Restraint of trade clauses are very common in commercial contracts. Most of us will have experienced restraint of trade (or non-compete) clauses within employment contracts where their purpose is to protect the employer’s business interests both during the employment and after the employment comes to an end. Exclusive Services Agreements can also be entered into throughout employment to reasonably protect the employer’s interests. Understandably, restraints against direct competition during the employment will rarely be held to be unreasonable, however, they must meet a much higher bar once the employment relationship has ended.
Outside of the employment space, both Restraint and Exclusivity Agreements are common in other general commercial agreements. Examples where these can exist include usual and ongoing trade relationships between two businesses, franchise agreements, or a contract for the sale of a business.
In determining the validity of a restraint, the party seeking to rely on the provision must show that they have a protectable interest and they must show that the restraint is reasonably necessary to protect those interests. When considering the reasonableness of the restraint the courts will consider a wide range of contributing factors including the circumstances at the time the contract is entered into, the relative bargaining position of the parties, the character of the business, the role of the restrained person or entity, the geographical range, as well as the levels of remuneration between the parties.
Exclusivity Agreements between parties must take into consideration unfair contract legislation, specifically, the balance in the parties’ rights and obligations, the reasonableness to protect the legitimate interests of the party imposing the terms, and any detriment to small business customers if the term were to be relied on. Additionally, exclusive dealings can fall under section 47 of the Competition and Consumer Act 2010 (Cth) and parties should consider whether their conduct may have an effect of substantially lessening the competition in the relevant market.
Accurate drafting of these Agreements and Clauses are the key to them being upheld. Get in touch with our team here for advice specific to your needs.
Lawyer & Chief of Staff