Restraint of trade clauses are not uncommon within commercial contracts. They operate to prevent one party from competing with the other during and after the agreement. They may arise in the context of placing restrictions on employment, restrictions between partners and restrictions in a contract for the sale of a business. For example, an employer may include a restraint of trade clause to protect their commercial interests by preventing an employee from using their systems, customers and intellectual property for the advantage of a competitor.
When will a restraint be reasonable?
Restraint of trade clauses will be enforceable to the extent that the restraint is reasonably necessary to protect the legitimate business interests of the protected party.
The determination of whether a clause is reasonably necessary is dependant upon the particular circumstances of the case. The reasonableness is not only assessed against the interests of the parties, but also against the interests of the public.
In assessing what is reasonable, the Court will generally consider the geographical range and time period of restraint. For example, a restraint on an employee from competing with their employer within 30km of the employer for a period of 10 years may be considered unreasonable, but a restraint of 15km for four years might be considered reasonable, depending on the circumstances.
The time for assessing the reasonableness of the restraint is crucial. It commences from the date the restraint was imposed as opposed to from the time the restraint is sought to be enforced or challenged.
RPR Maintenance Pty Ltd v Marmax Investments
Spanline designed, manufactured and sold home extensions or additions through a national network of franchises and sub-franchises. Since 2001, RPR Maintenance (RPR) had been a franchisee of Spanline in the New South Wales South Coast area. In 2003 Marmax, RPR and Spanline entered into a sub-franchise agreement granting a sub-franchise to Marmax, imposing restraint obligations on RPR to not promote, participate in, finance, operate or engage in business similar to or competitive with the Spanline franchise business in the Illawara franchise area. The same obligations were imposed on Marmax in respect of the South Coast franchise area.
The restraint period was given multiple definitions, via a ‘cascading clause’, ranging from 1 year to 10 years.
In assessing the reasonableness of the restraint of trade clause, it was noted that courts have generally taken a conservative approach in assessing the reasonableness of a restraint in a sale of business context as opposed to, for example, a contract of employment, due to a greater inequality in bargaining power.
The Court was of the view that the scope of the restraint clauses reasonably protected the legitimate interests of RPR, being the preservation and success of its exclusive Spanline franchise for the South Coast territory.
While the Court was of the view that multiple restraint periods were not unusual in commercial agreements, it was accepted that 10 years was unreasonable; the restraint should not extend beyond the life of the sub-franchise agreement as there was no certainty Spanline would renew any agreements.
In addition, any period beyond the 5 year term of the sub-franchise agreement was deemed as unreasonable as it would go against the interests of the public.
The Court found that RPR was able to establish that Marmax had breached the sub-franchise agreement by doing jobs in RPR’s territory whilst subject to the restraint. In doing so, the Court concluded RPR was entitled to damages and provided the parties with time to quantify damages in light of the Court’s reasons and agree to final orders.
Impact on commercial agreements
This case provides an example to of the operation and enforceability of restraint of trade provisions commonly found within commercial agreements.
While this case was specific to franchise agreements, the principles discussed by the Court are highly relevant to all persons who are currently subject to a restraint of trade clause in a commercial context, or may be subject to one in the future.
When entering an agreement, it is important for parties to identify any restraint of trade clauses and assess whether they will be an issue before entering the contract. As the case discussed illustrates, courts will not necessarily agree that the restraint is unreasonable.
A carefully worded restraint of trade clause can effectively protect the legitimate business interests and include a cascading clause, in respect to geographic restraints (e.g. 10km, 5km, 3km) and/or time constraints (e.g. 10 years, 7 years, 5 years). This will mean if the Court thinks one option is unreasonable, there are other options which can still apply.