03 October 2023
A “restraint of trade” clause in a contract seeks to restrain a person from conducting certain types of business or commercial activities. The law says that the restraint is unenforceable, unless it is reasonable for the protection of the legitimate commercial interests of the person trying to enforce it. Disputes often arise about whether a restraint is enforceable or not.
But what happens if there is a dispute about the restraint, and then the parties resolve that dispute by a settlement agreement which restates or varies the restraint of trade clause? Is that clause in the settlement agreement also subject to the law of restraints, or is it treated differently?
A recent NSW Court of Appeal decision considered that issue and found that the doctrine does apply to restraints imposed in settlement agreements, even where such agreements are “genuine and proper compromises” of disputes. In cases where the settlement concerns a controversy about a restraint of trade, the doctrine still applies. However, the certainty of settlement of the dispute is itself a legitimate interest, and the protection of that interest is to be weighed in the balance of reasonableness.
The restraint of trade doctrine concerns terms of contracts that place a restriction on a person’s freedom to engage in business, trade or employment. It is an exception to the principle of freedom of contract whereby parties to a contract are free to determine for themselves what primary obligations they will accept.
The restraint of trade doctrine recognises the public interest in allowing individuals to carry on their trades freely. Under this doctrine, a term of a contract will be void to the extent that it unreasonably restricts a party’s liberty to carry on trade or employment with third parties at some time in the future.
Terms that engage the restraint of trade doctrine are commonly found in the following kinds of contracts:
A restraint of trade will be enforceable if it is reasonable as between the parties. The restraint will be reasonable if, at the time the contract was entered into, it was necessary to protect the legitimate interests of the party benefiting from the restraint.
For example, in the case of an exclusive employment clause, the legitimate interest to be protected is ensuring that the employee’s performance in the role is not affected by an engagement or interest in another business that might hinder or interfere with his or her performance.
Commonly, the legitimate interest to be protected by a restraint is confidentiality over sensitive information. For example, a post-employment restraint will be reasonable, and therefore enforceable, if it is necessary to protect the business’ marketing strategy, trade secrets or client information.
Likewise, a non-compete clause in a sale of business contract will be reasonable if it is necessary to protect the goodwill of the business being sold and allow the buyer to take the benefit of the purchase by continuing to trade with customers or clients.
The or burden of proving that a restraint of trade clause is reasonable is on the party seeking to enforce the restraint.
When a party to a contract seeks to enforce a restraint of trade clause for its benefit, the party being restrained may dispute the reasonableness of the clause.
Whether court proceedings over the reasonableness of the clause have commenced or are merely threatened, both parties have an interest in reaching a compromise that will avoid the cost and uncertainty of seeing their dispute through to a trial. Where the parties settle the dispute, it is critical for any agreement reached between them to be properly recorded to ensure its enforceability. The settlement is often recorded in a deed of settlement and release (though, often a settlement agreement rather than a formal deed is adequate for this purpose).
The terms of the settlement will often restate or reframe the restraint that was the subject of the dispute in the first place. This raises the question – does the restraint of trade doctrine apply to restraints imposed in agreements entered as genuine and proper compromises of disputes? If so, is there a change in the onus of proving that the restraint is reasonable?
These questions were recently considered by the NSW Court of Appeal in Creak v Ford Motor Company of Australia Ltd  NSWCA 217.
The Court of Appeal recognised that, in cases of restraints agreed as genuine and proper compromises of disputes, the public interest in protecting the freedom of individuals to engage in business, trade or employment conflicts with the desirability of upholding settlements of disputes per se, and the desirability of facilitating settlements of disputes.
The background of the case is complicated, but the relevant facts can be summarised as follows:
At the trial, Mr Creak argued that Ford bore the onus of establishing that the restraints of trade were reasonable. However, the trial judge found that the doctrine of restraint of trade did not apply to the deed of settlement.
On appeal, the Court held that the doctrine of restraint of trade does apply to settlement deeds. However, the doctrine is modified where the settlement itself concerns a dispute over a restraint of trade.
The majority of the Court held that the question is not whether the onus of proof or persuasive burden is shifted to the person seeking to show that the restraint is unreasonable. Instead, the majority held that the preferred approach is to recognise that there is a legitimate interest in the certainty of the resolution of the dispute. The restraint still requires justification, but some restraints that might otherwise have been unenforceable might survive scrutiny because it was a reasonable means of resolving the prior dispute.
On the facts of the case before the Court, however, the settlement deed did not resolve a dispute about a restraint of trade – rather, it was about misleading conduct and passing off. Even so, Ford had a legitimate interest in protecting its right to give and revoke approval for the use of Ford trademarks. Considering all the circumstances, the evidence established that the restraints agreed in the settlement were reasonable and therefore enforceable.
If you have any questions about this article, please get in touch with our team below.
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.