The Future for Restraint Clauses in Australia?

What are they?

Restraint clauses are often included in sale of business contracts, shareholders agreements, employment contracts, and partnership agreements. They include:

• Non-compete restraints, which prevent a party from starting or being involved with a competing business;
• Non-solicitation restraints, which prevent a party from soliciting, approaching, or dealing with customers or clients;
• No poaching restraints, which prevent a party from enticing away employees, contractors or suppliers;
• Non-disclosure restraints, which prevent a party from disclosing confidential information. 

Are they enforceable?

Restraint of trade clauses are generally presumed to be unenforceable at Common Law, unless the party who is seeking to enforce the restraint can show that, at the time the contract was entered into, the cause was reasonable in the circumstances. In the state of New South Wales there is legislation which reverses this presumption so that a restraint clause is considered valid to the extent that it is not against public policy.  Either way it ultimately comes down to a similar question of assessing what was reasonable to protect the legitimate interests of the contracting party.    

When assessing the reasonableness of a restraint clause the Court will consider a range of factors specific to each case, including:

a)    the nature of the contract (for example, a non-compete clause in a sale of business contract will be viewed differently to one in an employment contract); 
b)    the duration of the restraint;
c)    the geographical area in which it is to have effect; 
d)    the activities which are to be restrained;
e)    the person’s seniority within the organisation;
f)    the extent to which the person’s role involved forming relationships with customers or clients; and
g)    the level of access that the person had to confidential information. 

The scope of a non-solicitation or non-compete clause can be unclear as they often include cascading alternate time periods and geographical regions, intended to allow a Court to ‘read down’ the restraint clause to what is considered reasonably necessary.  The Court can, on the application of either party, make a declaration as to whether or what extent the restraint clause is valid.  The Court can make an order on a temporary or final basis that restrains a party from engaging in conduct that may breach the clause.  The Court may also award damages or other financial relief against a party who is found to have breached a contractual restraint. 

What is happening in Australia? 

On 3 April 2024, the Australian Government released an issues paper titled ‘Non-Compete and other restraints: understanding the impacts on jobs, business and productivity.’  The paper cited data from the Australian Bureau of Statistics that 20.8% of Australian businesses used non-compete clauses in at least some of their employment contracts, 25.4% included non-solicitation clauses, and 45.3% reported using a non-disclosure clause.  There was a concern that the use of restraint clauses had increased over the past fives years and were not limited to executive level workers. The paper also cited evidence that restricting job mobility can supress wage growth and productivity. 

Australia is not alone in reviewing contractual restraints.  On 23 April 2024 the US Federal Trade Commission banned non-compete clauses in employment agreements and rendered existing clauses unenforceable.   In the UK the Department of Business and Trade has announced plans to impose a three-month limit on non-compete clauses.  Other jurisdictions in Europe restrict the use of non-compete clauses for employees earning below certain income thresholds.  It remains to be seen how the Australian government will respond, but legislative changes overseas provide clues on some potential options that may be under consideration. 

For more information contact Chris Stevens

Further reading: Australian Competition and Consumer Commission approvals

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As Alliott Global Alliances’s law firm member representative in New South Wales, Australia, the team at Deutsch Miller combines technical excellence, first class service and a practical, commercial approach to legal issues, earning them a reputation as the astute choice for international and domestic clients and their advisers when they face complex, critical commercial challenges and opportunities. Read more.