When interpreting Restraint of Trade clauses, the court will look at the context and the circumstances. The burden of proof lies with the party enforcing the clause, who must show that it is necessary to protect a legitimate business interest. The courts will not readily interfere with commercial agreements in this matter.
Restraint of Trade clauses must comply with the requirements
When inserting restraint of trade clauses in your contracts, you must first ensure that the clause complies with the requirements. This includes determining the scope of the restraint and determining whether or not it is reasonable. Generally, a restraint of trade should not be more onerous than what is necessary to protect your legitimate proprietary interest.
A restraint of trade clause may be part of a settlement agreement. These agreements, sometimes known as compromise agreements, aim to settle employment claims and are often used to lawfully terminate employment. Having a restraint of trade clause in a contract can help reduce the risk of unfair dismissal.
When drafting a restraint of trade clause, it is important to carefully consider how the restrictions will affect the business. For example, a restriction on a physical location may not be meaningful if most of your customer relationships are online. Additionally, the restrictions should be reasonable to both parties.
In addition to these requirements, restraint of trade clauses must be clear in their intent. If an employer intends to use a restraint of trade clause to prevent its former employee from leaving the company, the employer must demonstrate that the restraint is necessary to protect its legitimate interest. This may include an employee’s ability to compete or take a valuable business from a competitor.
While enforcing a restraint of trade clause requires a substantial amount of time and consideration, it is generally still reasonable if the restraint is tailored to the circumstances of the particular employment situation.
Carlton Hair International v Vinciguerra
Carlton Hair International, an international hair salon chain, sued a junior hair stylist, Joseph Vinciguerra, in the Labour Court. The company argued that Vinciguerra had breached a restraint of trade agreement. They sought an interdict against him and a year’s suspension, but Judge Hilary Rabkin-Naicker ruled against them. She said it was unreasonable to punish a junior employee who had only qualified six months before.
The restraint in question was included in the first respondent’s apprenticeship contract, a contract containing a ‘one size fits all’ covenant that didn’t differentiate between stylists of different levels. The first respondent argues that this restraint is unreasonable, since he has been qualified only for six months, and is only twenty-one years old.
Fishlock v Fishlock
In the case of Fishlock v Campaign Palace Pty Limited, the New South Wales Supreme Court found that a restraint of trade clause in an advertising contract was fair and reasonable. The contract contained a clause that prohibited Mr Fishlock from soliciting clients or conducting business of a similar nature for a year. The Court found that the restraint was reasonable, especially given Mr Fishlock’s seniority.
Under the restraint of trade provisions in contracts, courts can take into account the non-contractual intentions of the parties when considering the reasonableness of a restraint of trade clause. While the parties’ intentions need not be explicit in the contract, they need to be plausible. The court may also consider benefits that the parties intended to accrue from the restraint of trade.
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