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How enforceable restraints protect your business

How enforceable restraints protect your business

By Wisewould Mahony
March 23, 2015

Restraint of trade clauses are often used by employers to prevent former employees competing against them and soliciting their clients.

A well drafted restraint ensures that an employer’s hard earned goodwill is protected once the employment relationship comes to an end. On the other hand, a poorly drafted restraint is likely to be held unenforceable and is basically worthless to an employer.

The starting point to remember is that Courts only uphold restraint clauses to the extent that is reasonably necessary to protect the former employer’s legitimate commercial interests.

In making this assessment, Courts look at the restraint clause in terms of the following:

  • scope of activities restrained after employment has ceased;
  • geographical coverage of the activities restrained;
  • duration of the restraint; and
  • the certainty of the clause.

Recent decisions highlight the importance of getting the wording right to suit the individual circumstances of a particular employee or risk losing the benefit of such clauses altogether in employment agreements.

An example was in the case of Sear v Invocare Australia Pty Ltd [2007] WASC 30 where the Court held that a broadly drafted restraint clause was wider in its geographical coverage than was reasonably necessary to protect the legitimate commercial interests of the former employer. Another restraint clause was held to be invalid for uncertainty where it contained multiple time periods but was unclear as to how the time limits were to operate (Northern Tablelands Insurance Brokers v Howell [2009] NSWSC 42).

However, in OAMPS Insurance Brokers Ltd v Hanna [2010] NSWSC 781 a clause which provided for different distances and time periods of restraint of trade where each clause was severable and independently binding (referred to as a “cascading clause”) was held to be reasonable in the circumstances and therefore, enforceable. Furthermore, the recent case of Red Bull Australia Pty Ltd v Stacey[2011] NSWSC 1212 illustrates a willingness to hold senior employees accountable to employment agreements which contain restraint clauses in appropriate cases, particularly where the employees are highly paid.

In particular, employers need to take the time to ensure that each restraint is reasonable in the individual circumstances according to the employee’s position and the nature of the employer’s business. “Cascading provisions” providing for alternative geographical locations and/or time limits can be adopted in order to protect the employer’s legitimate commercial interests, but only where each is separate and independently binding.

Please contact Chris Pollard if you require assistance with updating and /or incorporating enforceable restraint clauses into your employment agreements.