Contracts frequently contain non-compete clauses, also known as restraint of trade clauses. Such clauses may be present in employment contracts, business purchase agreements, franchise agreements, and contracts where one party has access to the other party’s proprietary information and intellectual property. How a non-compete provision functions in Australia is explained in this article.
A Non-Compete Clause: What Is It?
A non-compete agreement forbids a party from exploiting trade secrets, intellectual property (IP), and general know-how to compete with a company with whom they are no longer under contract. These restraint provisions, however, are only enforceable in Australia if the court finds that they are reasonable to safeguard the party who benefits from the clause’s legitimate business interests. This makes sure a party isn’t unnecessarily barred from engaging in free market competition possible. They might be a worker quitting their job or a company looking for new business chances.
Non-Compete Clause Use
Current employees may have access to sensitive data, trade secrets, and proprietary information if they handle a company’s daily operations. Additionally, in order to compete successfully in the market, the company may need to divulge private information to third parties.
By prohibiting the party from exploiting sensitive information and taking part in particular competitive activities, a non-compete provision aids in safeguarding a company’s interests. Here are some instances where a non-compete clause might be included in a contract:
- Employment Contract: It is possible to place a six-month restriction on a senior or managerial employee’s ability to accept future employment in the human resources sector.
A franchisee operating a café company may not be allowed to operate a café within a two-kilometer radius of the franchise location, according to the terms of the franchise agreement.
- Sale of Business Contract: For three months following the sale of the business, a vendor of an accounting firm may not be permitted to run a new accounting firm.
- Producer Contract: A food product manufacturer might not be able to make comparable food goods for other companies.
Activities That Might Be Restricted or Competitive
The prohibited actions typically fall into one of three categories:
- Non-compete: This agreement forbids one party from going up against the other. For instance, prohibiting a former employee from looking for work in a cutthroat industry.
- Non-solicitation: This provision prohibits a party from approaching companies or people who may have previously done business with it. customers or clients, as an illustration.
- Recruitment: This paragraph, which is comparable to the one about non-solicitation, only refers to
the internal solicitation. It prohibits a party from approaching important figures within the company, like managers or senior staff.
A Non-Compete Clause’s Enforcement
A court must analyze a non-compete agreement to determine whether it is fair and, therefore, enforceable. A court may take into account the following three major factors:
- the region where the non-compete agreement is in effect;
- the actions that a non-compete agreement aims to prohibit; and
- The time frame to which the provision is applicable.
The restriction will be weighed by the court against the party’s commercial interests in having the non-compete agreement enforced.
Additionally, a non-compete agreement will only be upheld if it safeguards a real and quantifiable interest. A party attempting to enforce a non-compete provision must establish that it has a legitimate interest in doing so. They must therefore demonstrate that the limitations are actually essential. The following commercial interests may be safeguarded by an enterprise:
- Private information;
Trade secrets, perhaps
The Non-Compete Clause in Action
Multiple parties may be prohibited from engaging in competitive activities by the non-compete clause’s wording. For instance, people may be restricted in their roles as trustees of trusts, directors, or stockholders of corporations. The clause forbids someone serving in a specific job from founding a rival company or entity.
Unreasonable Non-Compete Agreements
A non-compete clause prevents one party from engaging in competitive activity, including employment, and has this effect. Unreasonable non-compete clauses should not be enforced since doing so is against the public policy of a market economy. This could prevent a party from taking part in the economy. If a clause stops one party from using their expertise or engaging in additional business endeavors, it may be deemed unreasonable.
If a court finds that a clause (or some portions of a clause) are irrational, the court may sever those portions. There are many cascading non-compete clauses as a result.
In essence, the court has the freedom to select from a range of options. Therefore, after the court determines which cascading word is the most reasonable, a modified version of the clause might be enforceable.
Questions To Think About
It is helpful to think about whether a non-compete clause will be fair or reasonable if you run a business or hire individuals. In order to achieve this, you need to assess the chance that the other party will accept such non-compete clauses.
You could use the following inquiries to decide whether a non-compete agreement is required:
- What actions do you want the party to refrain from taking?
- How long should the party refrain from participating in the activities? Specifically, do you want to stop a party from acting in a certain region or the entire world?
- Are the geographical areas appropriate to safeguard your interests?
- What are you attempting to defend as an interest?
- Does the opposing party concur that the interests are valuable enough to be protected?
If you want to safeguard your legitimate business interests, a contract must include a non-compete clause. A non-compete provision aids in preventing a party from exploiting proprietary information, secret information, or common knowledge to compete with the company they previously worked for. You should also carefully analyze any non-compete clauses in any contracts you draught or sign to make sure they are acceptable and do not restrict your ability to participate in the market economy.
If you need legal advice or assistance drafting a non-compete clause, get in touch with employment law lawyers Perth at (08) 6245 1258 or fill out the form on this page.