Some employment contracts, particularly for key employees, incorporate restraints on their post employment activities, generally to prevent them using their knowledge of the employer's business and customers to that employer's detriment in a particular area for a period after they ceased their employment.

Common law position of restraints

At common law, a restraint of trade is contrary to public policy and void, unless it can be shown that the restraint is, in the circumstances of the particular case, 'reasonable.' The onus of showing that a restraint goes no further than is reasonably necessary to protect the interests of the person in whose favour the restraint operates, lies on the party seeking to support the restraint as reasonable.

The test of reasonableness

The test of reasonableness is measured by reference to the interests of the parties concerned and the interests of the public. The requirement that the restraint be reasonable in the interests of the parties means that the restraint must afford 'no more than adequate protection' to the party in whose favour it is imposed. In light of this, consideration should be given to the following points:

  • An employer is not entitled to protection against mere competition
  • An employer is entitled to protection against the use by an employee of knowledge obtained by him or her of his or her employer's affairs, and the influence acquired by the employee over the employer's customers. These are sometimes referred to as an employer's legitimate protectable interests
  • A restraint clause will normally be invalid unless it is necessary to prevent disclosure of trade secrets, or the use of a connection built up by the employee with the employer's customers
  • The employee's skill and knowledge which the employer is entitled to protection against must be more than simply the skill and knowledge necessary to equip the employee as a possible competitor in the trade, but the obtaining of personal knowledge of, and influence over, the customers of his or her employer, or such an acquaintance with his or her employer's trade secrets as would enable him or her to take advantage of his or her employer's trade connection or utilise information confidentially obtained
  • The validity of a restraint is to be judged as at the time it was entered into, not the time at which it is breached. Although, where a restraint, reasonable in the circumstances as at the date of the contract, can be seen at the date of hearing to be excessive having regard to the circumstances as they have eventuated, the court may as a matter of discretion decline to grant injunctive relief
  • In determining whether a restraint is reasonable, it is relevant but not determinative, that the parties have bargained at arm's length on an equal footing.

So what is 'reasonable' in the eyes of the Courts?

A court, in weighing the question of reasonableness, will give full weight to commercial practices and to the generality of contracts made freely by parties bargaining on equal terms. Ultimately, however, whether a restraint clause is reasonable will, amongst other things, depend upon:

  • Its geographical coverage, including whether that coverage is wider than necessary to protect the employer's legitimate interests
  • The scope (or breadth) of the activities restrained (i.e. whether it seeks to restrain the employee from a greater range of activities than is required for the protection of the employer's legitimate interests
  • As to the duration of the restraint:
    • The type of confidential information to which a party had access, and the time during which such information remains current
    • The time necessary to sever the employee's connection with the former employer's customers or clients.

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.