Restraints of Trade Clauses in Contract Law

Restraint of trade clauses (RTC) are contractual terms intended to limit one of the contracting party’s freedom to continue with trade, engage in a future employment, or undertake a particular economic activity. RTC mainly appear in two forms of contract. The first one is the employment contract, and the second one is a business or commercial contract. In theory, the law of contract endeavored to ensure that each of the contracting parties has the ‘freedom of contract.’ In addition, the same law endeavored to ensure that there is ‘free market’, and competition takes place as a classical economic context for the exchange of transactions.

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Restraints of Trade Clauses
Restraint of trade clauses (RTC) are contractual terms intended to limit one of the
contracting party’s freedom to continue with trade, engage in a future employment, or undertake
a particular economic activity. RTC mainly appear in two forms of contract. The first one is the
employment contract, and the second one is a business or commercial contract. In theory, the law
of contract endeavored to ensure that each of the contracting parties has the ‘freedom of
contract.’ In addition, the same law endeavored to ensure that there is ‘free market’, and
competition takes place as a classical economic context for the exchange of transactions. With
these ambitions, common law and the law, in general, holds RTC provisions as illegal or
unenforceable due to public policy (Christensen & Duncan 2009, p.238).
The rationale of this approach has been based on the fact that restricting someone to
acquire employment or conduct a business is a limitation to that both party’s economic gains and
activities. RTCs have also been viewed as anti-trust practices that are meant to stifle competition
(Chitty 2012, p.1313). In Australia, RTCs are governed both in common law and in legislations
under (Restraints of Trade Act 1976).
The current legal position is derived from the ruling of (Nordenfelt v Maxim Nordenfelt
Guns and Ammunition Co Ltd 1891). Lord Macnaghten explained that the public interests are to
benefit from everyone in business through the freedom of carrying out trade. Therefore, the law
will disregard any action that purports to limit anyone’s liberty to trade or any action that would
contradict the public policy. However, the law may enforce such actions if they are justified upon
their reasonability, parties’ interests, and in reference to the public interests. This paper aims to
discuss the rules that govern RTC. The paper would be divided into two. The first part will take a

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general view of the RTC on both the employment and commercial contracts. The second part
would take a case scenario to provide an in-depth analysis.
PART A: Restraints of Trade Clauses (1500 words)
Like as explained above, restraint of trade clauses aims to limit one of the contracting
party’s freedom in case that party attempts to engage in a future employment or business. The
clauses appear in two forms of contracts; (i) Employment Contracts, (ii) Sale of a business or
commercial contracts. In a contract of employment, the main purpose is to prevent the employee
from soliciting the former employer’s customers or employees (Dent 2015). In a sale of a
business contract, RTCs are used to restrict the seller from setting up a similar business to the
one he/she just sold. The rationale is based on the fact that when the seller sold the business,
he/she did so in good faith, and the creation of another business similar to the one he/she just
sold would create competition for the buyer, which would solicit the customers from the sold
business.
Whether is for an employment contract or sale of a business contract, RTC would be
valid based on three requirements. (i) A valid interest which the RTC purports to protect. (ii) The
scope of RTC must not be unreasonable on the extent of the interest protected. (iii) The RTC
must not contradict the public interest.
(i) The Protection of a Valid Interest
In an employment contract, the court has always enforced RTC which seek to protect the
employer’s confidential information or trade secrets. The courts have viewed these as legitimate
interests if such the secrets or information came to the knowledge of the employee during the
course of the employment. For example, in (Two Lands Services Pty Limited and 1 Ors v
Gregory Robert Cave 2000), the employment agreement included an RTC that the defendant was

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not going to work for a competing firm for 12 months. The defendant was for 12 months
restricted from contacting any referrers that the claimant contacted. Considering these facts, the
Court ruled that the restrictions were enforceable for the protection of the information that both
parties understood as sensitive to the employer’s goodwill. By determining what should be
regarded as trade secrets or confidential information, the Court in (Wright v. Gasweld Pty Ltd
1991) provided that the determination of what amounts to confidential involves:
(i) The acquired skills were expended for the purpose of acquiring information.
(ii) The employer jealously guarded the information and it was not readily available to the
employee and could only get it with considerable effort.
(iii) The employer informed the employee that the information was confidential.
(iv)The usage and practice of the information within that industry support the reason for
regarding the information as confidential.
In the sale of business contracts, the interest is based on the ‘goodwill’ that the buyer
purchases along with the business. Goodwill is the existing ‘trade environment’ which the seller
had built. Therefore, goodwill comes with customers, and the set up of a new business by the
seller will attract old customers. In (Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co
Ltd 1891), Lord Macnaghten stated that laws regarding public policy are meant to encourage free
trade, but the same laws cannot allow a person to be denied the fruits of his labor. In this case,
fruits of labor were interpreted to mean what the purchaser considered when buying the business.
In (Herbert Morris Ltd v Saxelby 1916), Lord Shaw gave a detailed explanation that when the
seller sells of the business, the purchaser obtains a condition for non-compete which makes the
whole transaction valuable to the purchaser.

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(ii) The RTC must be Reasonable
The court will mainly look at the context of the RTC to find whether the interest it seeks
to protect is reasonable or not. There three factors for reasonability are a geographical area that
would be covered by RTC, duration, and the activities which would be protected. For example,
in (Southern Cross Computer Systems Pty Ltd v Palmer (No 2) 2017), an RTC restraining an
employee from working for a competitor for four years was supported. In (Cream v. Bushcolt Pty
Ltd 2004), the court also enforced a duration of 10 years RTC. Also in (Fitch v. Dewes 1921), the
court enforced a lifelong RTC. On the other hand, the court refused to enforce a two years RTC
while deciding the case of (Just Group Ltd v Peck 2016). In (Mason v. Provident Clothing and
Supply Company Limited 1913), the court found that an RTC limiting the employee for working
within 15 miles from London was sustained. The court stated that the 25 miles were too wide.
However, considering geographical coverage, the court will view RTC in E-commerce
differently.
While looking at the activities that the RTC seeks to protect, the Courts consider the facts
of each case differently. For instance, in (Littlewoods Organization Ltd v. Harris, [1978]), the
court ruled that even though the agreement does not include specific terms on the operation of
the clause, it can be construed to cover wide areas depending on the legitimate interests. Also in
(Clarke v. Newland 1991), an RTC that was broadly worded that a doctor should not practice was
construed to mean the entire medical practice as opposed to the practice in a hospital.
(iii) The RTC Must Not Contradict the Public Interests
Even though an RTC satisfies other requirements, the court may declare it as invalid if it
contradicts the public interests. For example, (Bull v. Pitney-Bowes Ltd 1967), it was ruled that
an RTC would be void unless an employer who wants to rely on it proves that it is only meant to

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protect his business interests. It was however stated that if the employee proves that the clause is
contrary to public interests, the employee’s proof will outweigh that of the employer. An
argument of public interests focuses on what the employer would have given to the public. For
example, the skills of a doctor are beneficial to the public, and so does the skills of an artist, or a
player. Restricting these people from working would mean that the public would be deprived off
a benefit it would have earned had these people allowed to carry out their work freely. These
sentiments were echoed in the ruling of (Wyatt v. Kreglinger and Fernau 1933). The case arose
out of an agreement that the plaintiff was to receive money as a pension for his retirement on
condition that he was not going to set up a wool business. When the pension was stopped, he
argued that the agreement was to provide a lifetime pension. The court stated that there was no
such agreement. And if the agreement was for a matter of an RTC, it would not have been
enforceable due to public policy.
PART B: Case Scenario. Padmapalasaki and Chandrakantha restaurant Vs. Priya
Issue:
Enforceability of RTC in a sale of business contracts. Could Padmapalasaki and
Chandrakantha enforce the clause restraining Priya from setting up a business within 20 KM?
Rule:
Like discussed above, restraint of trade practices happens when a party to a contract he
agrees to have to have their contracting liberty restricted for the future practices in business
activities or employment. In Australia, RTC is based on common law except for New South
Wales where RTC is regulated in (Restraints of Trade Act 1976). Whether in common law or in
the act, the case of (Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd 1891) was one
of the landmark cases that established that RTC is prima facie void due to their nature of

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contradicting the public policy. The case also established that an RTC can only stand in law if the
party relying on proves that it is reasonable.
In Australian law, the governing rules for enforceability of RCT are as follows. When a
dispute as to RTC comes to court, the first Court presumption is that RTC provisions are prima
facie void. In the ruling of (Ross & Anor v IceTV 2010), the judge stated the laws regarding RTC
are well established that any RTC that is divergent to public policy is void unless the party
relying on it justifies it two special circumstances. Secondly, when a party seeks to enforce an
RTC, that party can refute the presumption stated above by establishing that the clause is
adequate to protect its business interest and it does not diverge from the public policy. However,
the court is flexible on an RTC that seeks to protect the goodwill than on an employment contract
due to unconscionability of the bargain.
In the ruling of (Amoco Australia Pty Ltd v. Rocca Bros Motor Engineering Co Pty Ltd
1973), the Court declined to enforce an RTC that required the defendant to continue buying
petrol from the plaintiff for a period of 15 years. In the judgment, the Court found that the
‘exclusive dealing’ in the RTC was unreasonable as it went overboard in protecting a legitimate
commercial interest hence contrary to the public interests. Reasonableness in RTC is viewed in
terms of the duration of the RTC, the geographical area it is covering, and the interests it seeks to
protect. In (Ross & Anor v IceTV 2010; Heydon 2008, p.35), the meaning of reasonable in RTC
was clarified that it is not a requirement to prove how reasonable an RTC is, but to convince the
judge that the RTC is fair and reasonable for the given circumstances.
The geographical area in which the clause is covering must not be unreasonable. Courts
have provided some rules in guiding the distance. In most cases, the area depends on the facts
and the nature of the case. In (Herbert Morris Ltd v Saxelby 1916), the court stated that it will

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enforce a covenant where the distance stated would reasonably protect the vendor against the
competition from the seller. Where no distance is stated, the Courts have viewed the clause to
mean ‘unlimited’ distance, and any attempt to argue that the clause should be construed to mean
the area within where the sold business operates have failed. For example, in cases of (Butt v
Long 1953; Vancouver Malt and Sake Brewing Co Ltd v Vancouver Breweries Ltd 1934), the
court issued a declaration that where there was no suggestion for words of limitation on locality,
they cannot later be introduced.
Reasonability also extends to the time that the RTC is stated to apply. Again, the period of
time in which the clause intends to apply would depend on the context surrounding the business.
In some instances, the time for RTC is designed to decrease towards the geographical area of the
business, a method called cascading clauses. The clauses start by applying to a large area, as the
years go, they reduce until they finish with the area where the business is situated. This strategy
was held valid in the case of (Hanna v OAMPS Insurance Brokers Ltd 2010) where the clause
was stated to apply for 15 months in Australia. At 13 months it was going to apply to the State or
Territory, and at 12 months it was going to apply at the city.
The third rule in RTC regards contracts for the sale of the business. In this case, the court
may consider an RTC in a goodwill covenant as reasonable where the RTC is only operating in a
geographical area where if the seller is allowed to start a new business similar to the one he/she
sold, the actions will engage the buyer into the competition, and the goodwill sold along with the
business would thus be of no value. An illustration of this rule was stated by in (Herbert Morris
Ltd v Saxelby 1916) that when someone's selling the business, he/she sells with a piece of
property (goodwill), and agrees not to engage the buyer into the competition, and the law must
exempt the vendor from acting in the public interest if acting in the public interest would harm

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the bargain. Also in (Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd 1968), the court
accepted goodwill as a justified cause for enforcing an RTC.
Application:
While considering the scope of RTC, the court will consider three factors, these are its
reasonableness which is viewed in terms of the geographical area, duration, and interests.
Therefore, the restriction put on Priya would be weighed against these three elements. The Court
puts the onus of proving that the RTC is reasonable on the person seeking to use. In this case, it
would be upon Padmapalasaki and Chandrakantha to justify the use of the RTC in their
agreement. An assessment of the reasonableness of an RTC requires the Court to look at both the
interests of the contracting parties and the general public interests, the principle which was stated
in (Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd 1891). A clause is only
supposed to offer adequate protection without going overboard.
In assessing the Padmapalasaki and Chandrakantha, the court will first look at the
distance in which it seeks to be confined. In this case, the restaurant is located in Glen Waverly,
south-east of Melbourne, and the clause seeks to apply within a 20 km radius. In (Jaddcal Pty
Ltd v Minson [No 3] 2011), the Court stated that a reasonable area for an RTC is the area in
which customers would reasonably access a competing business. In particular, a distance of 22
KM radius was viewed to be reasonable for an RTC. Looking at the Padmapalasaki and
Chandrakantha RTC, a distance of 20 km radius would also seem reasonable.
Another factor that the court will look at is the duration of the restraint. In the case of
Padmapalasaki and Chandrakantha, the RTC has been designed to stay in force for 3 years.
Regarding the time period of RTC, the rules are that it should be reasonable in protecting the
stated interests. As the case for this case, 3 years is reasonable for a sale of the business. In the

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ruling of (Lloyd’s Ships Holdings Pty Ltd v Davros Pty Ltd), the Court ruled that a 10-year RTC
was reasonable. Also, in the ruling of (C&S Constructions Pty Ltd v Dawson, [1991]), the court
upheld a 5-year RTC. Again, in the case of (Pioneer Concrete Services Ltd Galli, [1985]), the
court found that an RTC for 5-years was reasonable. By looking at these cases, even a 3-year
RTC would be reasonable to Priya.
While looking at the interest in which the clause seeks to protect, goodwill has been
regarded as an element that the court will make the court enforce an RTC. In most cases, Courts
regard goodwill as a legitimate interest when a purchaser can protect with an RTC. Matters of the
sale of business In (Bacchus Marsh Concentrated Milk Company Limited (in Liquidation) v
Joseph Nathan and Company Limited 1919), the court stated that goodwill is an asset or a
property inseparable from the business when it is purchased. In (Hill v Fearis 1905), goodwill
was identified as the ‘advantage’ of a business as it enables the purchaser of a business to
represent to the public that the business is ongoing as what was being done previously. Taking
from this definition, if the seller is allowed to set a new business where old customers can
identify him/her, the purchaser would not be able to represent the continuity of the old business.
Therefore, when Priya sold the business to Padmapalasaki and Chandrakantha, the goodwill was
also sold, and the RTC should be enforced to protect it.
Conclusion
The court will enforce the RTC as it would be necessary for the protection of interests of
both Priya (seller) and Padmapalasaki and Chandrakantha (buyers).

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Reference List
Amoco Australia Pty Ltd v. Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 Amoco
Australia Pty Ltd v. Rocca Bros Motor Engineering Co Pty Ltd .
Bacchus Marsh Concentrated Milk Company Limited (in Liquidation) v Joseph Nathan and
Company Limited [1919] Bacchus Marsh Concentrated Milk Company Limited (in
Liquidation) v Joseph Nathan and Company Limited .
Bull v. Pitney-Bowes Ltd (1967) 1967 Bull v. Pitney-Bowes Ltd .
Butt v Long (1953) 88 Butt v Long .
Chitty, J. 2012, Chitty on Contracts: General principles, Sweet & Maxwell.
Christensen, S.A. & Duncan, W.D. 2009, Sale of Businesses in Australia, 2nd edn, Federation
Press.
Clarke v. Newland (1991) 1991 Clarke v. Newland .
Cream v. Bushcolt Pty Ltd (2004) 2004 Cream v. Bushcolt Pty Ltd .
Dent, C. 2015, (Potential) Regulatory Function of Contractual Clauses: Restraints of Trade and
Confidential Information in Employment Contracts, SSRN Scholarly Paper, Social
Science Research Network, Rochester, NY, viewed 19 October 2018,
<https://papers.ssrn.com/abstract=2678835>.
Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) 1968 Esso Petroleum Co Ltd v
Harper’s Garage (Stourport) Ltd .
Fitch v. Dewes (1921) 1921 Fitch v. Dewes .
Hanna v OAMPS Insurance Brokers Ltd [2010] Hanna v OAMPS Insurance Brokers Ltd .
Herbert Morris Ltd v Saxelby (1916) 1 Herbert Morris Ltd v Saxelby .
Heydon, J.D. 2008, The restraint of trade doctrine, Third edition., Chatswood, N.S.W. :
LexisNexis Butterworths, viewed 21 October 2018,
<https://trove.nla.gov.au/work/9207996>.
Hill v Fearis (1905) 1 Ch., 466 Hill v Fearis .
Jaddcal Pty Ltd v Minson [No 3] [2011] Jaddcal Pty Ltd v Minson [No 3] .
Just Group Ltd v Peck (2016) 375 Just Group Ltd v Peck .
Littlewoods Organisation Ltd v. Harris (1978) 1978 Littlewoods Organisation Ltd v. Harris .

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Mason v. Provident Clothing and Supply Company Limited (1913) 109 Mason v. Provident
Clothing and Supply Company Limited .
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1891] Nordenfelt v Maxim
Nordenfelt Guns and Ammunition Co Ltd .
Restraints of Trade Act [1976] Restraints of Trade Act .
Ross & Anor v IceTV [2010] Ross & Anor v IceTV .
Southern Cross Computer Systems Pty Ltd v Palmer (No 2) (2017) 460 Southern Cross
Computer Systems Pty Ltd v Palmer (No 2) .
Two Lands Services Pty Limited and 1 Ors v Gregory Robert Cave [2000] Two Lands Services
Pty Limited and 1 Ors v Gregory Robert Cave .
Vancouver Malt and Sake Brewing Co Ltd v Vancouver Breweries Ltd [1934] Vancouver Malt
and Sake Brewing Co Ltd v Vancouver Breweries Ltd .
Wright v. Gasweld Pty Ltd (1991) 22 Wright v. Gasweld Pty Ltd .
Wyatt v. Kreglinger and Fernau (1933) 1933 Wyatt v. Kreglinger and Fernau .