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Handcuffs: Restraints of Trade

When buying a business, it is critical to consider how to protect the worth of your investment. If the previous owner establishes the same business next door then the price you paid for any goodwill in the business is likely worthless.

Restraint of trade terms in a sale of business contract can help to protect your interests in these circumstances. They enable a purchaser to restrict where and when a previous owner can establish a competing business. There are, however, applicable restraint laws that need to be considered.

Enforceability:

In order for a restraint to be enforceable, it must be:

  1. Reasonable in the interest of the parties:  Does the clause protect a ‘legitimate interest’ or does it go beyond (i.e. too much) protecting that interest? If it is the latter, a court may rule that the clause is unenforceable. For example, restricting a previous business owner from conducting ANY form of business would be unreasonable because it goes beyond protecting the legitimate interests of the purchaser. If, however, the clause does protect the reasonable interests of the purchaser (for example, protecting the business’ goodwill or trade secrets) it is more likely  that a court will enforce the clause.
  2. Reasonable in the interest of the public: If the clause is unreasonable as to the public at large then a court may again rule that it is void and, therefore, unenforceable. As in the case Buckley v Tutty (1971) 125 CLR 353 at 380: the High Court said that “unreasonable restraints are unenforceable as it is contrary to public welfare that a person should be unreasonably prevented from earning a living in whichever lawful way he chooses and that the public should be unlawfully deprived of his services.”.
  3. Reasonable geographical area: If the restraint purports to put an unreasonable restriction on operating within a geographical area, a court may also find that it is void and of no effect. For example, a restraint which states that the previous business owner cannot trade in the whole of Australia or in the whole of the word, is likely to be unenforceable.
  4. Reasonable in duration: Excessive restraint upon duration of the restraint, such as restricting a previous business owner from competing ever again or for, say, 15 years, is again likely to be void to be unreasonable and unenforceable.

We have decades of experience in drawing and reviewing sale of business contracts including drafting and amending restraint terms with these common law principles in mind.  Please don’t hesitate to contact Meghan Warren to discuss further.

Contacts

Meghan Warren

Principal

Meghan Warren

Principal
LL.B GAICD B.Bus (FinPlan)
Meghan is one of the few lawyers in Australia admitted in the State (Victoria) and Federal jurisdictions of Australia, and as an Attorney at Law to the New York State Bar in the United States.

Kristy Muhlhan

Principal

Kristy Muhlhan

Principal
LL.B (HONS) GRAD DIP. L.P., GAICD.
Since 2014, she has been an owner and Principal of the firm and has mastered a broad range of essential commercial and business skills which go hand in hand with the work she does for...

Rosy Roberts

Principal

Rosy Roberts

Principal
LL.B (Hons) B.A GAICD
Rosy has extensive experience in Litigation & Alternative Dispute Resolution having represented clients in all Victorian State Courts and the High Court of Australia. She is also a VCAT appointed Administrator.

Anthony Burke

Consultant

Anthony Burke

Consultant
B.A LL.B DIP.FIN. MGT
Tony is an LIV accredited business law specialist and a VCAT appointed Administrator. In 2008 he was President of the Law Institute of Victoria and served for two years as a director of the Law...

Stewart Davis

Associate

Stewart Davis

Associate
As well as property law, Stewart has had exposure to VCAT administration matters and commercial law, particularly servicing developer clients.

George Hanger

Associate

George Hanger

Associate
LL.B BA
George was admitted to legal practice in May 2015 after completing a Bachelor of Arts at the University of Melbourne and a Bachelor of Laws at Monash University.

Antonela Graso

Paralegal

Antonela Graso

Paralegal
Whilst completing her professional business and law tertiary qualifications, Antonela provides efficient and effective legal support services to our valued teams and clients.

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