Restraint of trade

The restriction of business competition, sometimes regulated by legislation. Restraint of trade clauses in contracts are broadly considered contrary to public policy and prima facie void, unless it can be shown that the restraint affords no more than adequate protection of the interests at stake.

There are two typical restraint of trade provisions: those for sale of business transactions, and those in employment contracts. Under a typical ‘restraint of trade’ clause in a contract for sale of a business, the seller promises the buyer not to carry on a similar business for a specified period of time in a specified area (e.g. within a 5km radius of the original business for 3 years).

In NSW, the Restraint of Trade Act 1976 applies to ensure public interest and free trade are not eroded in the process of business dealings.