Restraint Of Trade Clauses For Australian Startups And Small Businesses

If you’re building a startup or running a small business, you’re probably investing a lot into your people, processes, customer relationships and intellectual property. Over time, that becomes your edge - the know-how, connections and systems that make your business valuable.

That’s exactly why restraint of trade clauses (sometimes called restriction of trade clauses) come up so often in commercial documents. You might want to stop a key employee from walking out with your customer list, or prevent a contractor from copying your model and competing immediately after finishing a project.

At the same time, restraints can be tricky. In Australia, they aren’t automatically enforceable just because they’re written into a contract - they need to be drafted carefully and be reasonable in the circumstances.

Below, we’ll walk you through what a restraint of trade clause is, when it’s most useful for a startup, what makes it enforceable (or risky), and practical tips to get the protection you want without overreaching.

What Is A Restraint Of Trade Clause (And Why Do Small Businesses Use Them)?

A restraint of trade clause is a contract term that limits what someone can do after their relationship with your business ends.

From a small business perspective, the goal is usually to protect your legitimate business interests, such as:

• customer relationships (especially where you’ve invested time and marketing into winning those customers)
• confidential information (pricing, product roadmap, internal processes, supplier arrangements)
• trade connections (introductions to referrers, suppliers, partners)
• workforce stability (preventing a departing person from poaching your team)

Restraint of trade clauses typically show up in:

• employment arrangements (including senior hires and executives)
• contractor agreements (developers, sales contractors, agencies)
• sale of business documents (where you’re buying goodwill and want the seller not to compete)
• founder/co-founder arrangements and shareholder documentation (where someone leaving could compete using inside knowledge)

It’s worth noting that restraint clauses aren’t designed to punish someone for leaving or stop normal career progression. They’re meant to protect what you’ve built - and to do that effectively, they need to be targeted and fair.

When Is A Restraint Of Trade Clause Most Important For Startups?

Startups often move fast, hire quickly, and share a lot of information internally to keep momentum. That speed is a strength - but it also means your risk exposure can be higher if key knowledge is concentrated in a few people.

In practice, restraint of trade clauses can matter most in these common startup scenarios:

1. When You’re Hiring For Sales, Partnerships Or Account Management

If someone’s role is to build and own customer relationships, the risk isn’t just that they leave - it’s that they take customers with them. A well-drafted non-solicitation restraint can help protect your revenue pipeline.

This often sits alongside a strong Employment Contract so expectations and post-employment obligations are clear from day one.

2. When Contractors Can “See Behind The Curtain”

Contractors can be essential (and cost-effective), but they sometimes work across multiple clients and industries. If your contractor has access to sensitive business information, you may want a targeted restraint (as well as confidentiality obligations) in your Contractors Agreement.

3. When You’re Protecting Product, Code Or Technical Know-How

A restraint of trade clause isn’t a replacement for proper IP ownership and confidentiality terms. But where a contractor or senior employee could realistically recreate your product quickly, a carefully limited restraint can add a layer of protection while you stabilise the business after their departure.

4. When Founders Or Key Team Members Might Exit

If you have multiple founders or shareholders, it’s common to deal with exit scenarios in your Shareholders Agreement. Depending on the business, restraints can be relevant here too - particularly where someone leaving could compete using strategy, customer relationships, or confidential information gained as an insider.

The key takeaway: restraints are most valuable where there’s a real risk to goodwill, confidential information, or trade connections - not just because someone has skills.

Are Restraint Of Trade Clauses Enforceable In Australia?

In Australia, restraint of trade clauses can be enforceable - but they’re not automatically enforceable.

As a general principle, a restraint will only be enforceable if it’s reasonably necessary to protect a legitimate business interest (and it goes no further than needed). The exact approach can also vary depending on the state or territory and the contract context - for example, New South Wales has the Restraints of Trade Act 1976 (NSW), which can allow courts to “read down” an unreasonable restraint so it operates to the extent it is reasonable.

Courts tend to look at the real-world context, including:

• your legitimate interest: what are you trying to protect (customers, confidential info, workforce)?
• the person’s role: seniority, access to customers, access to confidential information
• how wide the restraint is: time period, geographic scope, restricted activities
• the market reality: how your industry works and whether the clause is effectively a blanket ban

What this means for small businesses is that a strong restraint isn’t necessarily the longest or broadest one. A strong restraint is one that’s tailored and defensible if challenged.

If you’re unsure whether the restraint you want is likely to hold up, it can be worth getting restraint of trade advice before you roll the clause out across your contracts.

What Makes A Restraint Of Trade Clause “Reasonable”? (Time, Geography And Activities)

Most restraint of trade clauses can be broken into three moving parts:

• time (how long the restriction lasts)
• geography (where the restriction applies)
• activities (what the person is restricted from doing)

For a restraint to be more likely enforceable, each of these needs to match your actual business risk.

Time Period: How Long Is Too Long?

There’s no universal correct duration. What’s reasonable depends on your business model and what you’re protecting.

For example, if you’re protecting customer relationships, you might think about:

• your typical sales cycle
• contract renewal cycles
• how long it would realistically take to hand over an account and stabilise the relationship

Longer isn’t always better. If you set an excessive period, you increase the chance a court treats the restraint as unreasonable.

Geographic Scope: Local, Statewide Or Australia-Wide?

Geography should reflect where you actually operate (or where the person could realistically compete against you).

For a purely online business, geographic restraints can be hard to justify if the business truly operates nationally or globally - and sometimes focusing on activities (like soliciting your customers) is more practical than trying to rely on a strict geographic boundary.

Restricted Activities: Be Specific About What You’re Preventing

This is where many restraints either become too broad (and risky) or too narrow (and ineffective).

Common activity-based restraints include:

• non-compete: restricting a person from working in a competing business
• non-solicitation of customers: restricting them from approaching your customers or prospective customers
• non-poaching: restricting them from soliciting your employees/contractors
• non-dealing: restricting them from doing business with your customers even if the customer approaches them first (often more restrictive than non-solicitation)

For many small businesses, a targeted non-solicitation and confidentiality regime gives you meaningful protection without needing an aggressive “you can’t work in the industry” clause.

If you do use a non-compete, it should generally be drafted with particular care - and it may sit alongside a dedicated Non-Compete Agreement in higher-risk situations.

Practical Drafting Tips For Small Businesses (So Your Clause Actually Works)

A restraint of trade clause is only useful if it’s clear, tailored, and supported by the rest of your contract terms. Here are practical ways to approach it as a startup or small business owner.

1. Identify The Legitimate Interest You’re Protecting

Before drafting, get very clear on the why. Are you protecting:

• key accounts and goodwill?
• confidential pricing and margins?
• product roadmap?
• supplier terms?
• your team from being poached?

Once you know the interest, you can tailor the clause. This is also helpful if you ever need to explain why the restraint exists.

2. Use Confidentiality Obligations As Your First Line Of Defence

Often, businesses reach for restraints when the real issue is confidentiality. In many cases, a clear confidentiality clause (and careful handling of information internally) will do a lot of the heavy lifting.

If you routinely share sensitive information with staff, contractors, suppliers, or potential partners, a standalone Non-Disclosure Agreement can also be a practical tool - especially early in negotiations before you have a broader contract in place.

3. Avoid “One Size Fits All” Restraints Across The Whole Team

Restraints are not always appropriate for every role. A blanket approach (for example, giving every junior employee a long non-compete) can create friction, reduce candidate interest, and increase enforceability risk.

Instead, consider tiering restraints based on role risk:

• low risk roles: confidentiality + IP + basic non-solicitation (if needed)
• mid risk roles: targeted customer non-solicitation + employee non-poaching
• high risk roles: carefully limited non-compete, backed by strong confidentiality and clear definitions

4. Define “Customer”, “Confidential Information” And “Competing Business” Properly

Restraints often fail in practice because the definitions are vague.

For example:

• If “customer” is undefined, does it include leads? Past customers? Prospective customers?
• If “confidential information” is overly broad, is it realistic that everything the person learned is confidential?
• If “competing business” is too wide, are you unintentionally restricting unrelated work?

Clear definitions can reduce dispute risk because everyone understands what the clause is trying to prevent.

5. Make Sure Your Contract Foundations Are Solid

A restraint clause doesn’t exist in a vacuum. It works best when the underlying relationship is properly documented and consistent with how you actually operate.

For example, if you’re a company, your core governance documents (like a Company Constitution) can help support clean decision-making and processes - particularly if you’re dealing with founder exits, share transfers, or disputes where post-exit obligations (including restraint issues) may come into play.

6. Plan How You’ll Enforce It (Before You Need To)

Even a well-drafted restraint can be difficult to enforce if you’ve left things too late or don’t have evidence. Practical enforcement planning can include:

• keeping accurate records of customer allocations and who managed which relationships
• having clear offboarding processes (return of devices, disabling access, written reminders of obligations)
• making sure confidential information is actually treated as confidential internally (permissions, limited access, secure storage)

This isn’t about being heavy-handed - it’s about being organised, so if a dispute arises, you’re not scrambling.

Key Takeaways

• A restraint of trade clause is designed to protect your legitimate business interests (like goodwill, confidential information, and customer relationships) after someone leaves your business.
• In Australia, restraint clauses need to be reasonable to be enforceable, and what’s reasonable depends on the person’s role and the risk to your business (and can be affected by state-based laws, such as in NSW).
• The strongest restraints are usually targeted - with sensible limits on time, geography, and restricted activities - rather than broad blanket bans.
• For many startups, confidentiality and non-solicitation obligations are a practical first step, with non-competes used carefully and only where justified.
• Restraints work best when they sit inside a broader set of well-drafted contracts (employment, contractor, shareholder and confidentiality documents) and clear internal processes.

Need help drafting or reviewing restraint clauses for your startup or small business? Contact Sprintlaw on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

This article is general information only and does not constitute legal advice. For advice tailored to your situation, speak with a lawyer.