In order for a restraint to be enforceable, it must be
reasonable. In New South Wales, the Restraint of Trade Act
1974 (NSW) also allows a court to "read down" a
restraint clause so that it is reasonable.
For a restraint to be reasonable:
it must be necessary to protect a legitimate business
it needs to be for a reasonable period of time;
the geographical area must also be reasonable; and
consideration is given as to whether the employee has had
personal dealings with customers, suppliers, employees etc.
Usually a non-compete clause is a harder type of restraint to
enforce than a non-solicitation clause. A non-compete clause is
likely to be unreasonable and thus unenforceable where the employee
is prevented from engaging in any type of work. It is better if the
restraint seeks to prevent the employee from engaging in a
particular type of business or with certain competitors.
Tips for drafting effective clauses
Employers should make sure that restraint clauses are properly
drafted. Given the critical nature of these clauses to businesses
we would recommend advice be taken on the precise wording of such
clauses rather than apply a "cookie cutter" approach.
Bearing the need for some individuality in mind typically a
restraint clause should include:
a time period no longer than what is necessary to protect the
a geographical area no larger than what is necessary to protect
the business interest;
a limited non-compete clause – these clauses cannot be so
broad as to prevent the employee from earning a living; and
a limited non-solicitation clause – these clauses are
more likely to be enforceable where they are limited to those the
employee had personal dealings with and ideally within a limited
timeframe, for example personal dealings in the last 12 months of
What happens if a breach occurs?
Enforcing a restraint is a costly exercise and therefore advice
should also be sought as to whether the restraint is likely to be
enforceable and the remedies available.
You must also be able to demonstrate the damage or loss that has
occurred due to the breach of the restraint. Whilst the restraint
may be reasonable and enforceable, if the damage or loss is not
supported by sufficient evidence then a claim for damages may be
The Court read down the six month restraint to a period of two
months and confined the restraint to South Australia, and
subsequently held that the employee was in breach of the
"watered down" restraint. The employer claimed that the
employee owed damages for the loss its business suffered from the
However, the Court held that whilst the employer had a
legitimate business interest to protect and the employee had
breached her contractual obligations, the employer could not
quantify the loss and therefore damages were not awarded.
A delay in enforcing the restraint may also lead to a decision
against the employer.
Yahoo7 wrote to Fairfax proposing that Mr Harrison commence work
during his restraint period. Fairfax did not respond to this letter
for three weeks and then did not commence proceedings for a further
The Court found that the delay was substantial because it meant
that the injunction sought by Fairfax would only last for a period
of seven weeks and as such, decided not to enforce the restraint
because it had become of little utility.
If you suspect a breach has occurred then you must act
immediately – a delayed response may mean the court rules
that relief is not needed even where the restraint is reasonable
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.
Kemp Strang has received acknowledgements for the quality of
our work in the most recent editions of Chambers & Partners,
Best Lawyers and IFLR1000.
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Do not depart from the contract terms, or encourage the other party to do so, unless you plan to alter the contract.
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