The Enforceability of Restraint of Trade Clauses

Imagine this:

You’ve just sold your cafe business to someone else, and as part of the deal, you have agreed not to open another cafe in the same neighbourhood for a year.

Seems fair, right?

After all, the new owner needs a chance to establish themselves in the industry, without the distractions of looking over its shoulder, waiting for you to strike.

But what if you decide to open a cafe just down the street anyway?

Can the new owner stop you?

The answer may not be as straightforward as it appears.

In Queensland, the law generally favours a person’s right to work and ability to trade in a business or industry that they have experience working in.

HOWEVER, if the Court deems the restraint provisions reasonable and necessary to protect the new owner’s legitimate business interests, it can be enforceable.

The Courts take a balanced approach when deciding whether a restraint of trade clause is reasonable and necessary, and factors they consider include:

1. The duration of the restraint;
2. The geographical area it covers;
3. The ability for the restrained person or company to otherwise obtain work; and
4. Whether it’s necessary to protect the business’s goodwill or other legitimate interests.

For example, a restraint that prevents you from opening a cafe in the same suburb for a year might be considered reasonable. But if it tries to stop you from opening a cafe anywhere in Australia for the next decade, well, that’s a different story!

This is why restraint of trade provisions are often drafted as ‘cascading clauses’, so that there are ‘back up’ restraint provisions, when the overarching restraint terms could be considered unnecessary and unreasonable.

Queensland Courts are generally supportive of upholding contracts, as long as they don’t go against public interest. This means that if you’ve agreed to a restraint of trade clause, it’s likely to be enforced—provided it’s fair and reasonable.

So, the next time you’re entering into a business agreement, it’s worth taking a moment to think about any restraint of trade clauses. Are they fair? Are they reasonable? And most importantly, are they something you’re willing to abide by?