Australia: Costs, competition and restraint of trade clauses in commercial contracts

Drafting key clauses in commercial contracts - Part 4
Last Updated: 3 July 2014
Article by Paul Kordic
This article is part of a series: Click Mediation and arbitation clauses in commercial contracts for the previous article.

Practitioners are not entitled to fix their own costs in excess of the maximum specified in the applicable costs determination unless the practitioner has made a costs agreement.

The costs agreement must (from 1 July 2009) be made in accordance with Division 6 of the Legal Profession Act 2008 or the corresponding provision of a corresponding law to be enforceable.

Solicitor-client costs represent the amount a client is obliged to pay his or her solicitor as the price of professional work, the solicitor's entitlement thereto having its genesis in the costs agreement between solicitor and client.

Party-party costs on the other hand refers to the amount which the person to whom the order is directed must pay to another party to the litigation as partial indemnity for the professional legal fees and expenses incurred by that party in the course of the litigation. The duty to pay party-party costs is ordinarily sourced not from a contract but from an order of a court or tribunal.

If for example a costs clause in the contract says "The Lessee covenants with the Lessor to pay the Lessor's solicitors costs", if a costs agreement has been entered into between the Lessor and their solicitor this has the potential to result in higher recoverable costs payable by the Lessee if the words to the following effect are added: "on a solicitor-own client basis".

If on the other hand no costs agreement has been entered into between the Lessor and their solicitor the maximum that the Lessee will be liable to pay is the amount permissible under the applicable costs determination relevant to the contract.

Further as a third party payer the Lessee would be entitled to apply to a taxing officer for an assessment of the whole or any part of a bill for legal costs (Legal Profession Act 2008 Part 10 Division 8 s295).

8. Law/Forum

8.1 Choice of law

Courts tend to respect the parties choices as to law, and as to a place(s) whose courts they have agreed can (or must) determine their dispute (ie the forum).

Parties will be held to the consequences of foreign jurisdiction clauses agreed to as part of the contract, absent strong reasons to the contrary.

8.2 Choice of forum

A choice of forum clause on the other hand, manifests a selection by the contracting parties of a place (jurisdiction) whose courts they accept as either having exclusive or non-exclusive jurisdiction to resolve contractual disputes over issues arising between them.

In the absence of such a choice, common law conflicts of law principles may need to be applied in ascertaining which court or courts can determine a dispute or even hold off (stay) a court from doing so, in favour of courts of another place.

8.3 Extract of governing law and jurisdiction clause from standard stand-alone charge

17.5 Governing law and jurisdiction

  1. This deed is governed by the laws of [insert relevant jurisdiction].
  2. The Chargor irrevocably submits to the exclusive/non-exclusive jurisdiction of the courts of [insert relevant jurisdiction].
  3. [The Chargor appoints [insert name of process agent if Chargor has no presence in relevant jurisdiction] of [insert address] in relation to proceedings in [insert relevant jurisdiction] as its agent to received service of any legal process on its behalf without excluding any other means of service permitted by the law of the relevant jurisdiction.]
  4. [The Chargor irrevocably waives any objection to the venue of any legal process on the basis that the process has been brought in an inconvenient forum.]
  5. [The Chargor irrevocably waives any immunity in respect of its obligations under this deed that it may acquire from the jurisdiction of any court or any legal process for any reason including the service of notice, attachment before judgment, attachment in aid of execution or execution.]

9. Restraint of trade

The buyer of a business who pays for goodwill will normally seek to secure the future value of that goodwill by placing restraints on the capacity of the seller to continue to deal with customers, employees and suppliers of the business.

At common law, in the absence of any contractual restraint, a seller will be able to establish a new business, in competition to that which has been sold, even if the seller has sold the goodwill in the business.

There are some limitations imposed by common law on the seller's activities; although the seller is entitled to do anything in the conduct of a new business that an outsider would be entitled to do, the seller would be unable to solicit customers from his previous business.

However the protection provided by the common law is usually insufficient for a buyer and therefore specific provisions need to be included in the contract.

As a general proposition, covenants in restraint of trade are contrary to public policy and therefore, as a matter of general law, void and unenforceable. However the law will allow such a restraint if it is reasonable. Whether a restraint is reasonable will depend on questions of fact.

There are four variables which need to be considered in relation to the restraint of trade.

  • The persons who are to be subject of the restraint obligations;
  • The geographical extent;
  • The time period; and
  • The proscribed conduct which is to be the subject of the restraint.

In order to comply with the requirements particular care must be taken if it is decided to include a 'cascading' restraint of trade clause.

A cascading clause is where more than one item is included in the schedules dealing with restrained business, restraint area and restraint period, each of the combinations will be an operative restraint (unless it is found to be invalid).

Care should be taken when describing the time and area elements of the restraint covenant to ensure that the description is not meaningless. For example if an area is to be described by reference to a radius, the point from which it is measured should be specified.

Care should be taken in describing the 'conduct which is to be restrained'.

In all cases a purchaser should select reasonable restraints and consider carefully what businesses should be prohibited and the duration and extent of the restraint that will be required to ensure that the purchaser will have an adequate opportunity to obtain full benefit of the goodwill of the relevant business and to appropriate it to itself.

9.1 Extract of competition clause from standard business sale agreement


Restraint Area means each of the following:

  1. Western Australia;
  2. South Australia;
  3. Northern Territory;
  4. Victoria;
  5. New South Wales;
  6. Queensland;
  7. Australian Capital Territory;
  8. Tasmania; and
  9. the Commonwealth of Australia.

Restraint Period means:

  • the period of four calendar years commencing on the Completion Date;
  • the period of three calendar years commencing on the Completion Date;
  • the period of two calendar years commencing on the Completion Date; and
  • the period of one calendar commencing on the Completion Date.

14. Competition

14.1 Restrained Business

In consideration of the Buyer agreeing with the Seller to purchase the Business and Sale of Assets under this agreement, and in consideration of the Buyer agreeing to make an offer of employment to the Key Employee, the Seller and the Key Employee undertake and agree with the Buyer that the Seller and the Key Employee will not, during the Restraint Period within a Restraint Area:

  1. directly or indirectly conduct, carry on or promote on his own account or in any other capacity (including in partnership or joint venture); or
  2. be directly or indirectly engaged, concerned or interested in (whether as a trustee, principal, agent, shareholder, member, unit holder, director, secretary, executive officer, beneficiary, employee, independent contractor, consultant, adviser, manager, financier or in any other capacity), any company, trust, joint venture, partnership or any other form of incorporated or unincorporated entity or structure, which is directly or indirectly engaged, concerned or interested in, or conducting, carrying on or promoting, any business similar to or competitive with the Business as conducted at any time during the period of 2 years prior to the Completion Date (other than as a shareholder or unit holder holding less than 5% of the issued shares or units of a company or trust listed on ASX).

14.2.1 Restrained Conduct

On and from the Completion Date, in consideration of the Buyer agreeing with the Seller to purchase the Business and the Sale Assets, and in consideration of the Buyer agreeing to make an offer of employment to the Key Employee, the Seller and the Key Employee undertake and agree with the Buyer that the Seller and the Key Employee will not, directly or indirectly, whether alone or with any other person or party in any capacity including without limiting the generality of the foregoing trustee, principal, agent. Shareholder, member, unit holder, director, secretary, executive officer, beneficiary, employee, independent contractor, consultant, adviser, manager, financier or in any other capacity whatsoever during the Restraint Period within a Restraint Area:

  1. solicit, canvass or secure the custom of any person who is at the Completion Date, or who was at any time in the 2 years prior to the Completion Date, a client of the Business in connection with or in relation to any business or services which are similar to or competitive with the Business;
  2. represent themselves as being in way connected with or interested in the Business or any business carried on from time to time by the Buyer or a Related Corporation of the Buyer;
  3. except where disclosure is required by law or reasonably necessary to obtain professional advice, disclose to any person, or use to their advantage, or to the detriment of the Buyer or any Related Corporation of the Buyer, or cause to be so used or disclosed, the name of any client of the Business, or any of the Confidential Information and shall at all times keep such information confidential; or
  4. solicit the services of or employ any person who is at the date of this agreement, or subsequently becomes, an employee of, or consultant to, the Buyer or a Related Corporation of the Buyer.

14.2.2 Individual Restraints

Each of the restraints contained in clauses 14.1 and 14.2 resulting from the various combinations of the Restraint Period and the Restraint Areas constitute and shall be construed as separate, severable and independent provisions from the other restraints in regard to the Seller and Key Employee.

14.2.3 Acknowledgment as to reasonableness of Restraint

The Seller and the Key Employee acknowledge, agree and declare that each of the restraints contained in clauses 14.1 and 14.2 are reasonable in their scope and duration having regard to the interests of each party to this agreement and go no further than is reasonably necessary to protect the Buyer's interest as Buyer of the Business and the Sale Assets.

14.5 Consequences of breach of Restraint

The Seller undertakes and agrees to indemnify the Buyer and keep the Buyer indemnified in relation to any breach of the restraints by them or an Associate of them, contained in clauses 14.1 and 14.2 and acknowledges that the Buyer, in addition to any other remedy which may be available to it in law or equity, will be entitled to interim, interlocutory and permanent injunctions to prevent a breach, or threatened or anticipated breach, and/or compel specific performance, of the restraints contained in clauses 14.1 and 14.2.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click Mediation and arbitation clauses in commercial contracts for the previous article.
This article is part of a series: Click Retention of title and force majeure clauses in commercial contracts for the next article.
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