A restraint of trade clause is often used in business sale contracts to protect the value of the goodwill sold to the purchaser. Typical restraints include prohibiting the vendor from poaching employees, soliciting customers or competing with the purchaser’s business.
It is important that restraint of trade clauses are properly drafted so that the vendor will not be ‘trapped’ with unreasonable restraints, and so the purchaser is able to enforce the restraint if necessary. This is a highly litigated and complex area of law.
Butlers Business Lawyers are experienced in advising on and drafting these clauses business sale agreements, and representing parties in disputes relating to restraints of trade. If you need assistance with a sale of business or dispute involving a restraint of trade clause, call us on (02) 4929 7002 to discuss your matter with our experienced solicitors or email firstname.lastname@example.org.
Is the restraint of trade reasonable?
For public policy reasons, the law restricts the enforceability of agreements which restrict an individual’s freedom to work and conduct business. A restraint of trade clause will only be enforceable if it is reasonable and protects legitimate business interests.
The reasonableness of a restraint depends on a range of factors including the industry and nature of the business, limitations outlined in the clause, bargaining power of the parties and consideration paid to the individual who is restrained. In sale of business transactions, the consideration paid for the business is a particularly significant factor as a restraint of trade protects the goodwill being purchased.
Limitations on restraints of trade
Usually, restraint of trade clauses are limited on both a time and location basis. For example, a vendor may be restraint from competing with the business for 1 year from the sale and within a 5km radius of the business premises.
If there is a dispute about the application of the restraint, a court may need to determine whether the limitations set on the restraint were reasonable. In New South Wales, the court can ‘read down’ unreasonable limitations, and decide that the restraint may be enforceable but only with a shorter time period or geographic area. In other states, the court does not have the power to ‘read down’ restraint of trade clauses, but can ‘sever’ parts of the clause to create a more reasonable restraint. For this reason, many restraint of trade clauses include ‘cascading’ options for the geographic location and time period applying to the restraint. For example, a contract with a cascading restraint might specify that the relevant time period is ‘5 years’, ‘2.5 years’ and ‘1 year’ so the court has options if a longer period is found to be unreasonable.
It is prudent for vendors to discuss their business plans with their lawyer, and seek advice on how the restraint will impact on future activities. In some cases, the purchaser may agree to further limitations on the restraint. For example, the parties may agree that the restraint will not apply to particular types activities, or the vendor’s work with a particular client.
Restraints of trade can be a complex area, and it is important that vendors and purchasers ensure that their interests are protected. If you need assistance with a sale of business transaction or dispute involving a restraint of trade clause, call us on (02) 4929 7002 to discuss your matter with our experienced solicitors or email email@example.com.
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