There is a very developed body of law in relation to restraint clauses in employment contracts. Essentially they are very difficult to enforce as they are scrutinised very carefully by Courts with the onus being on the employer to prove that they are reasonable and necessary to protect the employer’s legitimate interests. For that reason, employee restraints need to be very carefully and conservatively drafted. Broad probations on the employee trading in competition with the ex-employer are most unlikely to be successful.
In a purchase of business situation however anti-competitive restraints have traditionally been viewed more favourably by the Courts. If a purchaser has paid a large amount of money for the good will of a business, it is often reasonable that the purchaser be protected from future competition by the vendor which might diminish the value of what the purchaser has paid for.
A recent decision of the NSW Supreme Court in the case of “Then There Were Three Pty Ltd v Douglas” is a reminder that even in a purchase of business situation, restraints will be carefully considered with the onus still being upon the party seeking the protection of the restraint to prove that it is reasonable and necessary.
In that case, the vendor and purchaser to a share sale transaction had agreed to a restraint which even contained an express acknowledgement by the vendor that it was reasonable in all the circumstances. The purchase price was payable by instalments over a four year period with those instalments being subject to adjustment depending upon the financial performance of the business after completion and also the retention of a key employee. Ultimately the Court held that these other grounds for adjusting the purchase price made the restraint clause less important to the protection of what the purchaser had paid for and declined to enforce the restraint.
Proper drafting of restraint provisions and enforcement of them when necessary is a matter requiring expert advice.
At Everingham Solomons, we have the expertise to assist you in all issues relating to the drafting and enforcement of commercial contracts because Helping You is Our Business.
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