Using Trade Restraints to Protect your most Important Asset

We often hear people say of trade restraints (or non-compete clauses) that: “they’re not enforceable, so why bother.” It’s true that a poorly drafted restraint obligation may not be enforceable – and may attract penalties under the Competition and Consumer Act 2010 (Cth) for lessening competition – but if these provisions are properly constructed, employers can ensure employees don’t run off with their customers and, in the case of a purchase, that a seller doesn’t lure back the customers the company has paid good money for. Whether it is set up as a restraint or a liquidated damages provision (or a combination), what is considered acceptable will ultimately depend on what is reasonably necessary to legitimately protect your business interest.
What is “necessary” will depend on the day-today operation of the business and such factors as the geographical spread of customers, the degree and frequency of personal interaction and the effect that the restraint has or will have on the employee’s ability to work in the industry. Make sure that any restraint clause is carefully worded and does not restrict an employee’s activities too widely or for longer than is reasonably necessary to protect your legitimate business interests Pre-determined breach fees (or liquidated damages clauses) are becoming more common and may be enforceable if the price to be paid is a reasonable pre-estimate of the loss suffered and if the contract does not prevent the restrained person from working in their chosen profession.
In the context of a business acquisition, generally speaking, restraints imposed on sellers (including departing shareholders in a company) are more easily enforced due to the clearer link between the restraint imposed and the payment received in consideration. Also, sellers will usually have received the benefit of legal advice on the implications of the restraint during general sale contract negotiations. Restraint terms should be included in shareholder agreements as well as employment contracts. Another useful tip when buying a business is to ensure that the individual directors are restrained along with the selling entity This reduces the chance that any of the key players can escape the intention of the restraint.
Trade restraints can be a powerful tool to help you protect your customer base and the goodwill inyour business. Ensuring that staff are signed up to enforceable non-compete clauses is often a fundamental part of any prospective buyer’s due diligence on your business – such clauses therefore can add value in addition to the deterrent to staff wishing to ‘jump ship’ and poach customers