SME - Do I have to comply with a restraint of trade clause in my contract?
A Restraint of Trade (RoT) clause will likely be found in most sale of business contracts. Such clauses are intended to prevent the vendor from competing with or damaging the business they have just sold.
## Types of RoT clauses Restraint of trade clauses differ, depending on the type of business they apply to. Typically, they can include:
- Non-Solicitation — prohibiting the vendor from soliciting or engaging clients, customers, suppliers or employees of the business.
- Non-Compete — preventing the vendor from setting up or being involved in a similar business which may compete with the sold business.
- Non-poaching — preventing the vendor from soliciting employees from the business.
- Non-disclosure (confidentiality) — prohibiting the vendor from disclosing specific information about the business (i.e. trade secrets and other information of a confidential nature). Restraint of trade clauses are typically drafted in a 'cascading' form. A cascading clause is one which progressively decreasing options:
| Time from date of settlement | Distance from Business Premises |
|---|---|
| 3 years | 100 km |
| 2 years | 50 km |
| 1 years | 200 km |
This method acts as a 'fall back' position to protect the purchaser in the event that the vendor challenges the restraint as being unreasonable. The cascading clause allows the court to work their way down the options and potentially find a suitable period of enforceability. Without the cascading clause, the Court may simply find the entire clause unenforceable.
Enforceability of RoT clauses
In Victoria, the legal position regarding restraints of trade is found in common law. In considering whether a Court would uphold a restraint, it is necessary to consider some of the following factors:
- the nature of the business;
- the location of the business;
- the price for which the business was sold;
- the amount of the goodwill and assets of the business;
- the negotiations between the parties; and
- the terms of the sale.
Perhaps obviously, the restraint must relate to a protectable interest. For examples, the restraint protects goodwill, trade secrets, employees, confidential information or customer and client bases.
If a restraint of trade is ultimately upheld, the vendor may be required to pay damages (depending on the loss suffered by the purchaser), or an injunction may be granted (a court order preventing the Vendor from doing something particular).
As a purchaser, it is critical you protect your new business. Contact our business lawyers to ensure you are adequately protected — Siobhan Liston on 03 5445 1067 or Lachlan Edwards on 03 5445 1031.