The Australian Government is currently seeking submissions on worker non-compete clauses and other restraints. Submissions can be made here: Worker non-compete clauses and other restraints | Treasury.gov.au. The government issues paper highlights the economic advantages of job mobility, and the concern that restraints may be restricting that mobility. This follows the United States where the Federal Trade Commission announced a ban on non-compete clauses in employment contracts on 23 April 2024. Many employers in the United States have expressed concern that the new rules might result in loss of the trade secrets to their competitors.
Any contractual obligation that restricts the liberty of a party as to future trade conduct and dealings with third parties is likely to be a ‘restraint’.[1] In Peters (WA) v Petersville the High Court stated that the question of whether there is a “restraint” is to be answered having regard to the practical working of the alleged restraint.[2] At common law a restraint contrary is to public policy and void, even if freely bargained for, unless it is reasonable to protect the legitimate interests of the public and the parties.[3] That the restraint was freely bargained for by the parties is not a sufficient reason for concluding that the doctrine should not apply, as all restraints have that character.[4]
The party receiving the benefit of the covenant bears the onus of demonstrating the restraint is reasonable, by reference to the interests of the parties and the public, at the time it is entered into.[5] Merely being protected from competition is not a legitimate interest.[6] Legitimate interests often include protection of the trade and goodwill of a business, recoupment of investment, enabling sales by securing and retaining customers.[7]
The law relating to restraint of trade may have a similar operation to parts of the Competition and Consumer Act, but the common law doctrine survives the enactment of that legislation.[8] The common law is free to develop independently of the statute and may result in provisions being unenforceable at common law even if permitted under the competition law provisions of the legislation.[9] Unlike the position in New South Wales, there is no specific statutory regime in Queensland dealing with restraints of trade.[10]
A contractual restraint entered through a deed of settlement relating to a dispute about another contractual restraint “does not attract the doctrine of restraint of trade”.[11] This exception is based on the public interest in upholding genuine compromises of litigation. Where prior dispute did not relate to a restraint, upholding genuine compromises will be a relevant consideration in determining whether the restraint was reasonable and not contrary to the public interest.[12]
Such clauses remain common to protect legitimate interests in a range of transactions and are frequently enforced. Common usages include a restraint on employees working for competitors or soliciting customers away from the employer, or business vendors being restrained from opening or working with competitor businesses. Due to the public policy considerations, drafting must take account of the risk of unenforceability. As there may be differences of opinion as to what would be reasonable in the circumstances, cascading clauses can be used to create multiple layers of obligation so that some will survive even if others are void.
Example
During the Term and the period of:
(a) 6 months;
(b) 12 months;
(c) 24 months,
after the end of the Term or termination of this Agreement, the Provider must not directly or indirectly, offer services equivalent to or compete against the Company’s Services within the Territory.
“Territory” means:
(a) the Brisbane City Council area;
(b) South-East Queensland;
(c) Queensland;
(d) Australia.
Each covenant and restraint set out in any subparagraph of this clause has effect and is to be interpreted as a separate and independent covenant and restraint.
The logic of a cascading restraint clause in Queensland can be seen in the cases. In EzyDVD v Lahrs Investments a strict clause imposing a restraint from opening a competing business for three years was held to be unreasonable in the circumstances.[13] This compares to Rich v BDO Kendalls where a tiered clause was upheld as a valid reason to grant an injunction for the period until the relevant dispute was held.[14]
From statutory perspective, if two parties are in competition with each other it should be noted that a contractual restraint may potentially be a cartel provision or a contract affecting competition pursuant to competition law,[15] and if so making such a contract or giving effect to such a provision is an offence and the provision is unenforceable.[16] A non-compete clause between competitors could be in breach of these provisions and unenforceable irrespective of the wording used.[17]
[1] Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; [2001] HCA 70, [54].
[2] Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; [2001] HCA 45, [14].
[3] Maggbury, n 53, [56]-[57].
[4] Maggbury, n 53, [56].
[5] Kingdom Animalia LLC v Mecca Brands Pty Ltd [2023] VSCA 55, [21].
[6] Tullett Prebon (Australia) Pty Ltd v Simon Purcell [2008] NSWSC 852, [47].
[7] Peter’s American Delicacy [1947] HCA 62; (1947) 77 CLR 574, 581.
[8] Competition and Consumer Act 2010 (Cth), s 4M; Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126, 140-141 [31]-[33] (Gleeson CJ, Gummow, Kirby and Hayne JJ).
[9] Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126; [2001] HCA 45, [32].
[10] The Restraints of Trade Act 1976 (NSW), s 4,
[11] Panayiotou v Sony Music Entertainment (UK) Ltd [1994] EMLR 229, 347.
[12] Creak v Ford Motor Company of Australia Ltd [2023] NSWCA 217, [31], [128].
[13] EzyDVD P/L v Lahrs Investments Qld P/L & Ors [2009] QCA 389.
[14] Rich v BDO Kendalls [2007] QCA 147.
[15] Competition and Consumer Act 2010 (Cth), ss.45AD and 45.
[16] Competition and Consumer Act 2010 (Cth), ss. 4L, 45AF, 45AG, and 45.
[17] SST Consulting Services Pty Ltd v Rieson [2006] HCA 31; (2006) 225 CLR 516; (2006) 228 ALR 417; (2006) 80 ALJR 1190; Springfield City Group Pty Ltd v Pipe Networks Pty Ltd [2022] QSC 255, [340]-[345].