If you are trying to understand what restraint of trade clauses are or trying to make sense of what they actually mean for your business, you’re definitely not the only one. Whether you’re an employer, franchisee, or just growing your business, these little clauses pop up more often than you’d think and they can have a big impact.
They might affect who you can hire, what you can do after selling your business, or how you protect your clients and IP. But a lot of people don’t realise how important they are until a problem arises.
What is a Restraint of Trade Clause?
A restraint of trade clause is a term used to stop someone from competing with your business, taking clients, or using confidential information after leaving the organisation or selling a business. These clauses appear in:
- Employment contracts
- Franchise agreements
- Business sale contracts
- Partnership or shareholder agreements
Their main purpose is to protect your business’s goodwill, and your client base confidentiality.
Are Restraint of Trade Clauses Enforceable in Australia?
Restraint of trade clauses in Australia are only enforceable if they are reasonable.
Any restraint is considered void unless the party seeking to enforce it can prove it goes no further than necessary to protect a legitimate business interest. Courts assess:
- The duration of the restraint (e.g. 6 months vs. 3 years)
- The geographic area covered (e.g. 10km vs. all of Australia)
- The scope of activities being restrained (e.g. working with direct competitors vs. entire industries)
Overly broad clauses are often struck down. For example, stopping a former employee from working in any similar business nationwide for 5 years is unlikely to be upheld.
Restraint of Trade in Franchise Agreements
When it comes to franchising business owners must be aware they have to include restraints of trade in their franchise agreements and must understand why these are critical.
These clauses aim to protect the franchisor’s brand, know-how, and customer base once the franchisee leaves the system or sells the business. For example, a franchisee might be restrained from:
- Opening a competing business within a certain distance of their former franchise location
- Using the franchisor’s confidential information to benefit a new business
- Soliciting clients or staff from the franchise network
The challenge is finding the right balance. Franchisors want strong protection. Franchisees want freedom to operate when they move on. If the clause is too strong, it may not be enforceable. If it’s too weak, the brand might be at risk.
That’s why both franchisors and franchisees need to ensure they get the best legal advice. At Rise Legal, we help franchisors draft enforceable, fair clauses and also help franchisees understand what they’re signing up for.
Restraint of Trade in Business Sale Agreements
When you’re buying or selling a business, restraint of trade clauses really matter. Just imagine taking over a business and then the former owner opens a nearly identical one just down the road a few weeks later. Not ideal.
In a sale, these clauses are meant to stop the seller from:
- Starting a competing business in the same industry
- Poaching clients or employees
- Using the goodwill they just sold to compete with the buyer
These clauses are more likely to be enforceable because they protect the buyer’s investment. But they still need to be reasonable in terms of duration and area.
If you’re selling a business, it’s really important to know how long you’ll be restricted from working in your industry and whether you can still do things like consulting or take on non-competing roles.
We’ve seen deals unravel because the restraint clauses were too vague or just way too restrictive. With the right legal advice, you can avoid issues like these and keep things smooth for everyone involved.
Common Mistakes Business Owners Make
Many business owners unintentionally put themselves at risk by:
- Using generic templates from the internet that aren’t suited to Australian legal standards
- Failing to tailor the clause to the specific role or industry
- Overreaching with broad and unenforceable terms
- Forgetting to update contracts as roles or business operations change
Why You Need a Business Lawyer for Restraint of Trade Clauses
A well-drafted restraint of trade clause should be like insurance: you might never need it, but it must work when you do. That’s where a commercial lawyer becomes essential.
At Rise Legal, we:
- Draft custom restraint clauses specific to your business
- Ensure they are reasonable and legally enforceable under Australian law
- Help you avoid disputes before they start
- Give you the peace of mind that your business is protected
We’re also plain talkers. No legal jargon, no fluff, just legal support that works in the real world.
Don’t Risk Your Business: Get Expert Advice
Whether you’re selling a business, hiring key staff, or entering into a franchise agreement, restraint of trade clauses can be one of the most important parts of your contract.
Make sure they actually protect you. Book a consult with Rise Legal today, and get expert advice on how to keep your business secure.
👉 Need help with your business legals? Contact us today for expert advice.
📩 Email us or book a free consultation today!
Remember, while this information provides a general overview, legal advice tailored to your specific circumstances is invaluable. Don’t hesitate to contact Rise Legal for personalised guidance or book in a free Discovery Call.
Disclaimer: This blog post is intended for informational purposes only and should not be considered legal advice. Consult with a qualified commercial lawyer for personalised advice related to your specific circumstances.
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