Restraint of Trade
Restricting Liberty To carry On Trade With Others
The doctrine of ‘restraint of trade’ is found within the common law. As such, the concept of a restraint of trade is not defined within the Competition and Consumer Act 2010 (Cth) (“the Act”).
The doctrine of ‘restraint of trade’ was defined by Lord Diplock in the case of Petrofina (Great Britain) Ltd v Martin [1966] Ch 146, 180, as:
“A contract in restraint of trade is one in which a party (the convenantor) agrees with any other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not party to the contact in such manner as he chooses.”
As a note, sections 4M and 51 of the Act limit the scope of a restraint of trade to the following provisions:
- Employment contracts;
- Partnership agreements; and
- Contract for the sale of a business.
‘Reasonableness’ of the Restraint of Trade
- Be reasonable in the interest of the parties; and
- Be reasonable in the interest of the public.
The onus to prove that the restraint of trade clause is reasonable in the interest of the parties lies with the person seeking to rely on the clause. However, it is the responsibility of the person seeking to void the restraint of trade clause that it is not reasonable in the interest of the public.
A court will usually assess some common factors when determining whether the restraint of trade is reasonable:
Whether there is a ‘legitimate interest’ that requires protection – common interests include:
- Protecting trade secrets;
- Protecting goodwill of a business; and/or
- Maintaining even competition.
Whether the restraint of trade does more than what is necessary to protect that interest – if it creates an unnecessary burden on one party, then a Court may not consider the restraint of trade to be reasonable.
Severance of a Restraint of Trade
If a Court finds that the restraint of trade in unreasonable, then it may be the case that the restraint is void in its entirety. However, there are circumstances where a Court may only ‘sever’ a certain part of the restraint of trade.
In NSW, section 4(1) the Restraint of Trade Act 1976 (NSW) defines the extent to which a restraint of trade clause is held to be valid:
- A restraint of trade is valid to the extent to which it is not against public policy, whether it is in terms severable or not.
By extension, subsection 3 also states:
- Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order.
This means that a Court may choose to enforce the restraint of trade and ‘read down’ the restraint to the extent that it is not unreasonable.
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