Are you considering the purchase of an established business? If so, then you need to make sure that the previous owner will not be establishing another business that may stand as a direct competitor of the company you recently acquired. In the same way, if you have an independent contractor or employee, you need to make sure that that person will not establish business relationships with your suppliers, customers, and clients.
This is where the restraint of clause comes into play. In order to protect your company or business and to ultimately prevent direct competition by the former owner, employee or independent contractor, you need to take legal action.
What Is a Restraint of Clause and Why Is It Important
A restraint of clause, also known as the non-compete clause, is what restricts people from establishing types of businesses within a specific geographic area and within a specific time frame. This clause is usually incorporated with several types of contracts namely: (1) Employment contracts; (2) Business sale contracts; (3) Shareholder agreements; and (4) Independent contractor’s agreement.
If you include a restraint of clause in your contract, you need to make sure that the content is reasonable and essential in protecting your business’ legitimate interests. It should not be too restrictive as the clause will be held invalid. This is because there is what we call strong public interest to ensure that a person will be able to earn an income and do their trade.
In general, it is not really of public interest to restrict one person’s ability to work and earn. So you need to be familiar with the three main elements of the restraint of clause that the Court will look into so you can establish whether or not your business needs reasonable protection.
The Three Main Elements of a Restraint of Clause
When including a restraint of clause in a contract, these three elements will be required by the Court:
- Area of the restraint;
- Duration of the restraint; and
- Type of activity or employment being restrained.
You need to remember that each element of the restraint should be included in different clauses of a contract. Why? Because in Queensland, if a restraint of clause is really reasonable and essential to protecting a business, then the unreasonable clause will be held invalid. If this happens, then the restraint of clause will not be enforceable and included in the contract.
With that said, provisions of the restraint trade should usually be in the form of cascading clauses. For instance, a cascading clause would prevent a person to engage in a specific type of activity or work within the largest of the following geographical areas:
- Within Brisbane;
- Within 5 km of the business premises;
- Within 10 km of the business premises;
- Within Queensland; and
- Within South-East Queensland.
And within the longest of the following periods of time:
- Three months;
- Six months;
- One year; or
- Two years.
How the Restraint of Trade Clause Works
Remember that a cascading clause is a great way for a person that seeks to enforce the restraint to implement the broadest permitted restraint area with the longest time period whilst lowering the risk of causing the clause to become invalid.
Given the example of a cascading clause above, the restraint of clause would cite that if any of the time periods or geographical areas listed in the clause are unreasonable and excessive, then they will be deleted and the longest reasonable restraint time period and the largest reasonable restraint area will be overcome.
Now if the restraint of clause is reasonable and essential in protecting your business’ legitimate interests then the Court will also consider the type of future employment of those being restrained. Given the fact the previous owner of the business you acquired has been paid with the agreed amount from the buyer, knows most of the business confidential information and even had relationships with the clients, then the previous owner would likely have a broad restraint clause enforced on them. However, the restraint clause will not be valid on the previous employees that don’t have any contact with the business’ clients or have no access to confidential business information.
The most important thing that you need to do is to properly draft the restraint of the clause. Doing this would prevent unfair competition by the previous people who already acquired confidential information from the business or company you already acquired and purchased.
Here at GLG Legal, we pride ourselves on providing the right solutions for our clients. Our professional commercial lawyers in Brisbane will help you prepare the restraint of trade clauses so that we can help you protect your business.