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Restraint of Trade Laws in Australia: What You Need to Know
Restraint of trade laws are a crucial aspect of business law in Australia and most people will come across them at sometime of their working life.
These laws are designed to protect the interests of businesses, employees, and customers by preventing unfair competition and ensuring that businesses can operate freely and effectively.
The general principle applicable to restraints of trade is that they will be held void unless they can be justified as reasonable.
The party seeking to enforce a restraint of trade clause in a contract, often an employer or franchiser, carries the burden of proving that the restraint is reasonable.
When determining whether a restraint is reasonable, several factors must be taken into account.
Additionally, a restraint will be imposed more readily and more widely upon the vendor of the business in the interests of the purchaser than upon a former employee in the interest of the employer. Finally, whether a restraint is unreasonable is to be determined by its effect and operation in practice.
To illustrate how restraint of trade laws can come up in a business context, let’s consider at two case studies.
Case Study 1: Non-compete clauses in employment contracts
Non-compete clauses are a type of restraint of trade that is commonly found in employment contracts.
These clauses prohibit employees from working for a competing business or starting their own business in the same industry for a set period after leaving their current employer.
While non-compete clauses can be reasonable in some cases, they can also be overly restrictive and prevent employees from finding work in their chosen field. As a result, courts will carefully scrutinise these clauses to ensure that they are necessary and reasonable.
For example, imagine that a former employee of a medical practice challenges a non-compete clause that prevented her from working for any competing business within a 10-kilometer radius for a period of 12 months after leaving her job. The court would question whether the clause was overly restrictive if it prevents the employee from working in her chosen field within a reasonable geographic area. If the question were to be yes, then the clause would be unenforceable.
Case Study 2: Sale of a business with a restraint of trade clause
Restraint of trade clauses are also commonly found in contracts for the sale of a business. These clauses prevent the seller from competing with the buyer’s business for a set period after the sale.
In these cases, courts will consider the nature of the business, the geographic area in which it operates, and the duration of the restraint when determining whether the clause is reasonable.
Additionally, courts will consider the amount of the purchase price paid, including any amount paid for goodwill, as a relevant factor.
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Another case study – restraint of trade clause involving a restaurant
Take the following case study: a purchaser of a restaurant business tries to enforce a restraint of trade clause that prevented the seller from operating a competing business within a 5-kilometer radius for a period of 2 years after the sale. The court would consider whether the geographic area was limited or too broad and whether it was necessary to protect the buyer’s investment in the business.
What can you learn from this?
In conclusion, restraint of trade laws are a vital aspect of business law in Australia.
Whether you are an employer, an employee, or a business owner, it is important to understand these laws and how they can affect you. If you have any questions about restraint of trade laws or need assistance with a legal matter we can assist. Contact us on 03 9527 1334 / 03 9521 3454.
Please note the above article is general in nature and does not constitute legal advice.
Please email us info@iplegal.com.au if you need legal advice about your brand or another legal matter in this area generally.