Has your business partner, franchisee or employee recently left your business and set up shop nearby? Enforcing your restraint of trade clause may be harder than you think
Restraint of trade clauses are a common feature of many commercial contracts, particularly business sale agreements, franchise agreements and employment contracts. Their purpose is to protect a party’s confidential information and business (including client relationships) from being used by a former associate (such as an employee, franchisee or vendor) after the contract ends.
However, many people are surprised to learn that enforcing restraint clauses can be difficult, even when they form part of written, signed contract.
Restraints are sometimes found to be void for public policy reasons that encourage market competition. The person seeking to enforce the restraint has the onus of proving that the restraint is reasonable to protect a legitimate interest.
If a breach of a restraint is alleged, an application to the court can be made for an injunction to restrain person from breaching their restraint clause. This is usually granted on an interim basis pending a trial to determine the validity of the restraint clause and any associated issues.
Two cases decided by the Supreme and District Courts of Queensland show the court’s approach to applications of this type, and the practical consequences for the parties involved.
Amalgamated Pest Control v Gillece
In the case of Amalgamated Pest Control v Gillece, Amalgamated had granted its franchisee, Gillece, a licence to operate a pest control business trading as Amalgamated Pest Control in a specified region.
After some years, Gillece terminated the licence agreement, and created a new business called Border Regions Pest Control and traded in the same region.
Amalgamated sued Gillece, seeking to prevent Gillece from trading in an area for 3 years.
The District Court found that Amalgamated had a “legitimate interest” to protect, being the patronage of the franchised business and confidentiality of product and processes.
However, the court refused to order the injunctions to restrain Gillece from operating its competing business, because:
- it was unclear from the licence agreement which area the restraint was to apply to;
- 3 years was an unreasonably long restraint period; and
- damages may be an adequate remedy to compensate Amalgamated for any financial loss it suffered, rather than restraint.
Auto Parts Group v Cooper
In Auto Parts Group v Cooper, the Supreme Court ordered two former employees who resigned to take up employment with a competitor, to comply with certain restraint and confidentiality provisions in their employment contract.
The Court noted that restraints were more difficult to enforce against employees (because an employee should be free to pursue a living in their chosen field), but the employer’s relationship with its customers, trade secrets and confidential information were legitimate interests that could be protected.
The Court accepted Auto Parts Group’s evidence that the employees knew of confidential information belonging to Auto Parts Group and that it would take at least 6 months to re-establish relationships with its customers and connections, that had been managed by the former employees.
Importantly, the employees’ dishonesty when citing reasons for their resignation and their future employment plans meant the court rejected much of their evidence as being unreliable.
A well drafted, reasonable restraint clause can provide a business with valuable protection. However, the outcome of enforcing a restraint will depend on its specific facts in each case.
If you have any questions or need assistance with reviewing your agreements containing restraint clauses, contact our Dispute Resolution team on 07 3220 2929 or send your enquiry to firstname.lastname@example.org.
About Kathleen Anderson
Kathleen Anderson is a Senior Associate in the Dispute Resolution team at Plastiras Lawyers. Kathleen helps SMEs prevent and resolve disputes arising in their day to day businesses. Her expertise includes advising businesses on contract breaches, partnership disagreements, debt disputes and negligence claims.