Nicholas Kyriakoudes

Restraint clauses are terms which restrain and restrict a person’s ability to engage in a specified activity for a specific time and throughout a particular locality. They are generally included in contracts or made as a separate deed (of restraint) to protect one party’s business interest and to ensure that competition does not occur. For example, a restraint clause may be included in a contract for the purchase of business. This is to ensure that the Vendor does not start competition against the purchaser by setting up a similar business next door or in a close proximity to the purchaser’s new business right after the purchaser has made their purchase or for such a period to allow the purchaser to start to run their business successfully.

Restraints can be useful in allowing a particular party to have assurance that the restrained party will not interfere or stifle their activities. Common types of restraints include: non-compete, non-solicitation, non-poaching, exclusive service, and confidentiality clauses.

What can be restricted

A restraint generally has three main components. The first involves restricting or prohibiting a particular activity. A person may be restrained from becoming a director of a competitor, running a similar business, disclosing confidential information (to see more about confidential information read  or from poaching clients from a business.

The second component generally outlines the period for which the restraint is in effect. For example, a contract may specify a Vendor of a business cannot be a director of a similar business for a period of 2 years after completion of the sale.

The third component of a restraint is that it generally operates by reference to a geographical locality. A restraint will specify the location in which it takes effect. This might be indicated by reference to a jurisdiction such as country or state, for example throughout the whole of Australia or NSW, or by reference to a set kilometer radius, such as 50km or 5km.

Public policy consideration

Under law any restraint of trade must not be contrary to public policy. This requirement generally means that the terms of a restraint of trade clause and/or deed needs to be reasonable and not overbearing in the circumstances.

Whether a restraint is contrary to public policy is a question of fact. However, as a guide, to pass the public policy test restraints generally must:

  1. Protect a legitimate business interest, and
  2. Be reasonable to protect that interest.

For example, it would be wholly unreasonable to restrain the Vendor of a café in NSW from operating and running a new café in Queensland. This is because the Vendor cannot possibly poach customers or compete with the café in NSW. An appropriate restraint in these circumstances might be that the Vendor cannot run a café within 2km of the sold café. That is because it is possible that they might poach or compete with the sold café within such a close distance. Similarly, it would be inappropriate to restrain the same Vendor from running a new café for a period of 50 years after completion of the sale. This is because that restraint period is too long and cannot reasonably be seen to protect the Purchaser. Instead a shorter restraint period will be more appropriate.

Reading down invalid restraints

Under s 4(3) of the Restraints of Trade Act 1976 (NSW) a person subject to a restraint can apply to the Supreme Court to seek orders a restraint be made invalid or read down. For this purpose, many restraints are drafted to provide for a cascading ladder in an attempt to facilitate an appropriate restraint which passes the public policy test if the court reads a proposed restraint down. For example, a restraint may provide a period of non-activity for 6 years, and if that is not applicable 3 years, and if that is not applicable 1 year. The purpose of such a clause is to attempt to indicate alternative periods/terms of restraint in the event that the first or subsequent designated period (in the above example 6 years, then 3 years) fails the public policy test.

If you would like further advice in relation to a restraint clause or deed please contact us at or on 42 222 666.