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Restraint of Trade | Overview

 

Overview and application

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

 

Cases relating to Restraint of Trade

See cases page.

 

Books and articles relating to Restraint of Trade