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About Restraint of Trade

In Australia the common law doctrine of restraint of trade continues to operate where it does not conflict with the Competition and Consumer Act 2010. Briefly, the doctrine renders provisions which impose restrictions on a person's freedom to engage in trade or employment illegal and therefore unenforceable at common law unless they are demonstrated to be reasonable. The provision must be reasonable both in the interests of the parties and in the interests of the public.

Definitions of restraint of trade

It is important to distinguish restraints of trade from agreements which merely regulate trade. As Justice Brandeis famously stated in External linkChicago Board of Trade v US 246 US 231 (1918) at p 238:

‘Every agreement concerning trade, every regulation of trade, restrains.  To bind, to restrain, is of their very essence.’

Lord Justice Diplock LJ, in Petrofina (Great Britain) Ltd v Martin [1966] Ch 146, 180 defined a restraint of trade as follows:

A contract in restraint of trade is one in which a party (the convenentor) agrees with any other party (the convenentee) to restrict his liberty in the future to carry on trade with other persons not party to the contract in such manner as he chooses.

The line between restraints falling within the doctrine and those that are incidental to trade and fall outside the doctrine is not at all clear.

Application of the doctrine in Australia

In Australia the doctrine is now limited in scope because of the operation of the Competition and Consumer Act 2010, which captures much of the sort of conduct that might previously have fallen for consideration under the doctrine. There are, however, some exceptions. In particular, s 4M provides that the ROT doctrine continues to apply in so far as it can operate concurrently with the Act and s 51(2)(b)(d)(e) excludes from the operation of Part IV of the Act (other than s 48 governing resale price maintenance) provisions relating to:

  • restrictions on employment
  • restrictions between partners and
  • restrictions in a contract for the sale of a business. 

Consequently it is in these areas that the ROT doctrine is most likely to operate.

The common law doctrine

Reasonableness and legitimate interests

All agreements in restraint of trade are void unless:

  • they are reasonable in the interest of the parties (onus on party relying on restraint); and
  • they are reasonable in the interest of the public (onus shifts to person seeking to strike down restraint to demonstrate they are not reasonable in the interest of the public)

When assessing reasonableness the courts will first consider whether there is a 'legitimate interest' or interests that require protection and, if so, will assess whether or not the restraint does not more than is necessary to protect that interest; if the restraint goes beyond what is necessary then it will not be considered reasonable.

A wide range of interests may be considered legitimate, including protecting trade secrets and protection of business goodwill, and even the creation or maintenance of an even sporting competition (see, for example, External linkAdamson v New South Wales Rugby League Ltd (1991) 31 FCR 242). However, mere protection against competition does not constitute a 'legitimate interest' (see Vancouver Malt and Sake Brewing v Vancouver Breweries [1934] AC 181)

Time for assessment

The time for assessing the reasonableness of the restraint is the date the restraint was imposed; reasonableness is not assessed at the time the restraint is sought to be enforced or is challenged. See, for example, External linkAdamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 per Justice Gummow:

‘But there always remains the basic proposition … that the reasonableness of a restraint of trade must be tested, not by reference to what the parties have actually done or intend to do, but what the restraint entitles or requires the parties to do … in my view it was not the case that the issue of reasonableness of the restraint was to be determined by looking to the manner in which from time to time it operated in practice or might operate in practice. …’

Severence

Parties will frequently draft restraint clauses to provide for different levels of restraint, in the hope that if one or more restraints are found unreasonable, others may nevertheless survive. These are known as ladder clauses and can be effective, provided they are not uncertain (by reference to normal contractual principles) and provided that the parties have made a genuine attempt to define a reasonable restraint and not left it to the court to 'make their contract for them. The more numerous the restraints and/or combinations of restraint involved, the more likely the parties have failed to make a genuine attempt to define the protection. See, for example, External linkLloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd (1987) 17 FCR 505.

Note, the position has been altered by legislation in NSW - see below.

 

Legislation

Competition and Consumer Act 2010

Section 4M Saving of law relating to restraint of trade and breaches of confidence

This Act does not affect the operation of

(a) the law relating to restraint of trade in so far as that law is capable of operating concurrently with this Act …

but nothing in the law referred to in paragraph (a) or (b) affects the interpretation of this Act.

Section 51 Exceptions

...

(2)  In determining whether a contravention of a provision of this Part other than section 45D, 45DA, 45DB, 45E, 45EA or 48 has been committed, regard shall not be had:

(a)  to any act done in relation to, or to the making of a contract or arrangement or the entering into of an understanding, or to any provision of a contract, arrangement or understanding, to the extent that the contract, arrangement or understanding, or the provision, relates to, the remuneration, conditions of employment, hours of work or working conditions of employees;

(b)  to any provision of a contract of service or of a contract for the provision of services, being a provision under which a person, not being a body corporate, agrees to accept restrictions as to the work, whether as an employee or otherwise, in which he or she may engage during, or after the termination of, the contract;

(c)  to any provision of a contract, arrangement or understanding, being a provision obliging a person to comply with or apply standards of dimension, design, quality or performance prepared or approved by Standards Australia or by a prescribed association or body;

(d)  to any provision of a contract, arrangement or understanding between partners none of whom is a body corporate, being a provision in relation to the terms of the partnership or the conduct of the partnership business or in relation to competition between the partnership and a party to the contract, arrangement or understanding while he or she is, or after he or she ceases to be, a partner;

(e)  in the case of a contract for the sale of a business or of shares in the capital of a body corporate carrying on a business - to any provision of the contract that is solely for the protection of the purchaser in respect of the goodwill of the business; or

(g)  to any provision of a contract, arrangement or understanding, being a provision that relates exclusively to the export of goods from Australia or to the supply of services outside Australia, if full and accurate particulars of the provision (not including particulars of prices for goods or services but including particulars of any method of fixing, controlling or maintaining such prices) were furnished to the Commission before the expiration of 14 days after the date on which the contract or arrangement was made or the understanding was arrived at, or before 8 September 1976, whichever was the later.

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Restraints of Trade Act 1976 (New South Wales)

New South Wales has introduced the External link Restraints of Trade Act 1976 which provides:

Section 4 Extent to which restraint of trade valid

(1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.

(2) Subsection (1) does not affect the invalidity of a restraint of trade by reason of any matter other than public policy.

(3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order.

(4) Where, under the rules of an association, a person who is a member of the association is subject to a restraint of trade, the association shall, for the purposes of subsection (3), be deemed to have created or joined in creating the restraint.

(5) An order under subsection (3) does not affect any right (including any right to damages) accrued before the date the order takes effect.

As a consequence of section 4(1), a restraint of trade clause may be read down and enforced by a court in circumstances where it would not be possible to sever all or part of the offending restraint at common law.

 

Cases relating to Restraint of Trade

 

Books and articles relating to Restraint of Trade