I'm being restrained?

What on earth is a 'restraint of trade' clause and why is it in my contract?

'Restraint of trade’ (also known as non-compete) clauses are common in executive contracts in Australia and New Zealand. The purpose of the clause is to restrict an employee from moving to a competitor business or conducting business in competition with the employer. By restricting you, the employer seeks to protect the interest of their business. These clauses are often used in conjunction with ‘non-disclosure’ (don't tell anyone anything) and ‘non-solicitation’ (don't take my clients or other staff members when you leave) clauses for largely the same purpose - they propose that the employee is constrained to protect a business interest. These types of clauses are frequently seen in executive contracts because executives have access to commercially sensitive information.

When assessing the reasonableness of such clauses Courts in both countries will consider similar issues. However the approach and emphasis in each jurisdiction varies, with Australian courts being prone to striking out unreasonable clauses and the New Zealand Courts being prone to ‘blue penciling’* such clauses in order to render agreements enforceable. Both Court systems will be concerned with the following issues:

Protection of legitimate business interests

Both jurisdictions will assess whether the employer has a legitimate business interest that justifies restraint. Examples include: protecting client relationships, trade secrets or confidential information. In Australia restraints that protect the business's goodwill or prevent the misuse of sensitive knowledge are more likely to be upheld. While in New Zealand Courts emphasise that the clause should not unfairly restrict the employee's right to work beyond what is necessary to protect these interests.

Geographical scope and duration

Both jurisdictions will consider the area covered by the restraint in proportion to the regions where the business operates.  Excessively broad geographical restraints or overly long durations are likely to be deemed unreasonable. New Zealand courts are generally more conservative regarding geographic scope and duration and if a restraint is too broad, they are more willing to modify it to be more reasonable (e.g., reducing the geographical area or shortening the time limit).

Impact on the Employee’s ability to work

The Courts in both jurisdictions will balance the restrain’s impact on the employee’s ability to earn a livelihood against the protection of the employer’s business. New Zealand courts place a stronger emphasis on the employee's right to work and earn a living, and will closely evaluate whether the clause imposes unnecessary hardship on the individual.

It may seem counterintuitive or perhaps a little uncomfortable to consider the end of your period of employment when you are considering a job offer. However it is the single most powerful time to do it. You have maximum leverage (you can decline the job offer at cost to the employer) and at this stage of your career with this employer it clearly does not signal that you might be thinking of leaving. The questions to ask yourself, include:

• Is the contracted role senior enough to warrant a ‘restraint of trade clause’? (i.e. Is the role  likely to have access to sensitive commercial information?)

• Does the clause identify the geographic scope and duration of the restraint? If so, do you consider this is proportionate to the likely business interests? (e.g. If the business is only operating in New Zealand and the restraint clause is framed as ‘Oceania’ this may be disproportionate to a legitimate business interest.)

• Are you comfortable that the clause is 'fair' and proportionate to the role?

When considering these clauses, there is no right and wrong answer, it is a question of how much risk you are comfortable taking on. This isn't easy because looking into the future and trying to figure out how you might actually be restrained is essentially your best guess. However by asking some questions and actually engaging in the discussion, you are demonstrating that you are thoughtfully considering and analysing the offer being made to you.

* ‘Blue penciling’ refers to a practice of modifying, amending or deleting an unenforceable contract provision so the remainder of the agreement is enforceable.