Overview
A well-drafted restraint of trade (ROT) clause, like a well-constructed gate, can offer valuable protection to your business. A poorly put-together ROT clause is likely to collapse under challenge and will not prevent your employees from setting up in competition.
Stress points in restraint of trade
ROT clauses are primarily used to stop employees from setting up business in competition with, or using information connected with, a business after they leave the employ of that business.
At common law, ROT clauses are prima facie unenforceable, however with a little care they can be very useful tools. Where the clause is not contrary to public policy, and is reasonable, it may well be upheld, as occurred in the case of Birdanco Nominees Pty Ltd v Money [2012] VSCA 64. There, it was held that “The nature of the restraint, the extent to which it operated and the damages payable were such that… the restraint was no more than was reasonably required to protect the legitimate interest of Bird Cameron.”
How to build a sturdy restraint of trade
Remember the GATE way to enforceability of your ROT clause:
- Genuine Interest – ROT clauses will only be effective if there is a genuine interest to protect, such as goodwill, and the restraint itself should be limited to protecting that interest and that interest alone.
- Area – Set reasonable and precise geographical bounds to which the restraint applies. Setting the area as “Australia” will most likely be unenforceable, particularly if it prevents the individual from making a living. Depending on the industry, precluding an individual from working, for example, in “Melbourne” would also likely to be unenforceable, due to the ever-expanding nature of the city and the failure to stipulate precise boundaries. Limiting the restriction to a reasonable, well-defined geographical area is more likely to be upheld.
- Time – Remain realistic when setting the time period for which you wish the restraint to operate. Attempting to restrain trade “for all time” is far less likely to be seen enforceable than “for a period of one year following cessation of employment”, or similar limitation.
- Extent – To what extent do you wish to restrain the former employee? Clauses restraining an employee from at all working in the same industry (even for a period of one year) are unlikely to be upheld, as that the employee would be disadvantaged by being unable to earn an income.
It’s all about reasonableness, as is much of the law. When looking at restraint of trade clauses ask yourself this – if the shoe were on the other foot, would you wear it?
