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Restraints of trade

Last updated May 2024

This chapter outlines different types of restraint of trade clauses in an employment contract and how to ensure they will be legally enforced.

What is a restraint of trade clause?

Definition: Restraint of Trade Clause

A restraint of trade clause is a clause in a contract that restricts a person from engaging in economic activity beyond the term of the contract.

A restraint of trade clause is only enforceable if the court is satisfied that it offers reasonable protection for a legitimate interest of your business, and is not contrary to public interest.

Caution: The restraint of trade principle clashes with the legal concept that when two parties freely enter into a contract, they should be bound by it. Additionally, courts typically frown on restraint of trade clauses because they can restrict the ex-employee from earning a livelihood. Due to this conflict, the restraint of trade principle has been watered down so that some restraint of trade clauses can only be enforced in certain circumstances.
Important: The Competition and Consumer Act 2010 (Cth) prohibits a corporation from making provision in a contract that has the likely effect of substantially lessening competition. However, this prohibition does not apply to restraints of trade in employment contracts or contractor agreements.