When buying a business or company, hiring employees or dealing with business partners protecting your commercial interests using a restraint of trade clause is important. However there are practical issues to address to ensure you do it properly.
Restraint of Trade Clauses
The reason we require restraints is so that we can protect business interests such as our goodwill, business relationships, confidential information and intellectual property. The types of restraint provisions include prohibiting:
- confidential information from being used outside of the business;
- a person from competing through a similar business;
- a person from dealing with or offering similar goods or services to existing customers;
- a person from dealing with existing suppliers of the business;
- the offering of employment to existing employees or contractors of the business.
The Law – Can you enforce a restraint?
Under Australian Federal and State legislation, a restraint which imposes restrictions on an individual to trade or take employment is illegal and unenforceable unless it can be shown that the restrictions are reasonable having regard to the parties’ interest and public interest. This common law test applies to restraints relating to:
- employment relationships;
- partnership arrangements;
- arrangements entered into for the sale of a business or company.
What is the appropriate restraint?
An employee
Employees who are in sales roles will typically have built strong relationships with customers. Executives in financial roles will have access to pricing and profit information, and supply and input costings. An executive may have access to strategic planning and product development information and insights, and been responsible for managing a team of employees who reports to them. The appropriate restraints are as follows:
- a restraint on being involved in or employed by a similar business during employment;
- a prohibition on using confidential information (such as customer lists, supplier contacts, pricing information) during and after employment;
- a restraint in soliciting business or acting for the employer’s customers for a period of at least 12 months after leaving their employment;
- a restraint in soliciting employees or contractors of the employers for a period of at least 12 months after leaving their employment.
A Partner
A partner or shareholder in a business shall have access to confidential information and be involved in the management and operation of the business. Restraints should apply to a partner during the business relationship and after the business relationship ends (where the business partner sells his or her share). The appropriate restraints are as follows:
- a restraint on being involved in or employed by a similar business during the business partnership;
- a prohibition on using confidential information during and after the partnership;
- a restraint in soliciting business or acting for the customers for a period of at least 3 years after the ending of the partnership;
- a restraint in soliciting employees or contractors of the partnership for a period of at least 12 months after leaving the partnership.
- a restraint upon the partner using any name the same or similar to the partnership name.
The Sale of the Company or Business
Where the owner of a business or company sells the business or the shares in a company, the expectation of the buyer is that the goodwill of the business is preserved and that the seller does not compete with the business after the sale. The appropriate restraints are as follows:
- a prohibition on using confidential information of the business;
- a restraint on being involved in or employed by a similar business for at least 3 years after the sale – the restraint will apply to at least the current territories the business operates within however should be extended to territories where the business may have potential reach;
- a restraint in soliciting business or acting for the customers for a period of at least 3 years after the sale;
- a restraint in dealing with key suppliers to the business for at least 3 years after the sale;
- a restraint in soliciting key employees or contractors of the business for a period of at least 2 years after the sale – and conversely locking key employees to minimum term contracts.
- a restraint upon the seller using any name the same or similar to the trade names;
- prohibiting the seller from developing competing technology or intellectual property – this restraint is dependent on the importance of IP.
Adrian Fong
Director – Corporate and Commercial
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A+F Commercial Lawyers offers specialist legal advice to assist in the establishment, expansion, operation and divestment and acquisition of businesses and corporate groups.
www.afcomlaw.com.au