Restraint Of Trade Clauses In Australia: What Small Businesses Need To Know

When you’re building a small business or startup, your time and money often go into the essentials: winning customers, hiring your first team members, launching new products, and creating systems that can scale.

But as soon as you start hiring (or partnering with contractors, advisers, or co-founders), one practical question usually comes up:

How do you stop someone from taking your clients, staff, or confidential know-how and competing against you?

This is where restraints of trade come in. Used properly, restraints of trade can be a helpful way to protect your commercial interests. Used poorly, they can be unenforceable (or even create extra risk if you rely on them without putting other protections in place).

Below, we’ll break down how restraints of trade work in Australia, what small businesses and startups should focus on, and how to structure restraints so they’re more likely to hold up when it matters.

What Are Restraints Of Trade (And Why Do They Matter For Small Businesses)?

A restraint of trade is a clause in a contract that limits what someone can do after (or sometimes during) the relationship.

For example, a restraint might say a person can’t:

• compete with your business for a certain time after leaving
• approach or “poach” your clients or suppliers
• solicit your employees to join a competing business
• use your confidential information to build a competing product or service

For small businesses and startups, restraints of trade matter because your most valuable assets are often:

• relationships (customers, referral partners, suppliers)
• know-how (processes, pricing models, sales scripts, product roadmap)
• team capability (key staff who hold operational knowledge)
• momentum (a competitor gaining a shortcut can be costly)

A well-drafted restraint doesn’t replace a strong business model. But it can reduce the risk of unfair competition, especially where someone has had close access to your customers or confidential information.

Are Restraints Of Trade Enforceable In Australia?

In Australia, restraints of trade are not automatically unenforceable, but they are closely scrutinised.

The general principle is:

• Restraints of trade are generally presumed to be void because they restrict competition and someone’s ability to earn a living.
• However, a restraint can be enforceable if it is reasonable and goes no further than necessary to protect a legitimate business interest.

This means you can’t use restraints of trade simply to “stop competition” in a broad sense. You need a real, protectable interest.

What Counts As A “Legitimate Business Interest”?

Common legitimate interests a small business might need to protect include:

• Confidential information (like customer lists, pricing, marketing strategy, systems)
• Customer connections and goodwill (especially where a team member was the main point of contact)
• Stability of your workforce (preventing targeted staff poaching)

On the other hand, trying to restrain someone merely because they’re talented, or because you don’t want competition, is much harder to justify.

Why “Reasonable” Is The Core Issue

Reasonableness is usually assessed by looking at things like:

• time (how long the restraint lasts)
• geography (where the restraint applies)
• scope (what activities are restricted, and how broad that restriction is)
• the person’s role (seniority, customer access, confidential access)
• the industry context (how quickly information becomes outdated, how local the market is)

Practically, the more senior the person and the more access they had to sensitive information and client relationships, the more likely a stronger restraint is to be viewed as reasonable.

Where You’ll See Restraints Of Trade In Your Business Contracts

Restraints of trade can show up in several places across a growing business. Knowing where they sit (and what they should do) helps you avoid gaps in protection.

Employment Contracts

The most common place small businesses use restraints is in employee agreements, especially for sales roles, senior staff, or anyone who manages key accounts.

If you’re hiring, it’s worth ensuring your Employment Contract is tailored to the role, rather than relying on a generic template. The enforceability of restraints often depends on context, and the “context” comes from the contract and the employee’s actual duties.

Contractor Agreements

Startups and small businesses often rely heavily on contractors (developers, marketers, consultants, bookkeepers). Contractors can have deep access to systems and strategy, even if they’re not employees.

Restraints can be included in contractor terms, but you’ll want to be especially careful about drafting (and practical enforcement), because contractors usually work with multiple clients and may be in business for themselves.

Business Sale And Purchase Agreements

If you’re buying a business, you usually need restraints to ensure the seller doesn’t take the goodwill you just paid for and immediately compete.

These restraints are often broader than employment restraints because you’re paying specifically for the customer base, brand goodwill, and market position.

Co-Founder, Shareholder, And Key Partner Arrangements

In early-stage startups, one of the biggest risks can be a breakdown in the founder relationship. If a founder leaves and tries to take customers, IP, or the team, it can be seriously disruptive.

This is one reason founders often build protections into a Shareholders Agreement, alongside other rules around decision-making and exits.

What A Well-Drafted Restraint Of Trade Should Cover (And Common Mistakes To Avoid)

When restraints of trade fail, it’s often because they’re drafted too broadly or don’t match the commercial reality of the relationship.

Here’s what strong restraints usually get right (and where many small businesses trip up).

1. Be Specific About The Conduct You’re Restricting

Instead of trying to ban “competition” entirely, many businesses use a combination of narrower restraints, such as:

• non-solicitation of clients (can’t approach your clients for a period)
• non-dealing (can’t do business with your clients even if the client approaches them)
• non-solicitation of employees (can’t encourage your staff to leave)
• confidentiality obligations (can’t use or disclose sensitive information)

Narrower restraints are often easier to justify than broad “you can’t compete in the industry” provisions.

2. Match The Duration To Your Business Reality

A restraint period should relate to how long your business needs to protect itself.

For example:

• If your sales cycle is short and customer decisions happen quickly, a long restraint may be harder to justify.
• If you’re in a relationship-driven industry where it takes time to rebuild trust with clients, a longer period may be more reasonable.

There is no universal “standard” period. The right time period depends on your business model, role seniority, and market conditions.

3. Keep Geographic Limits Realistic

Geographic limits are often where restraints of trade become overreaching.

A local service business might justify a smaller radius around a particular suburb or region. A national online business might approach this differently, but even then you need to think carefully about what “geographic restriction” means when your market is digital.

If your business operates Australia-wide, it may be more defensible to restrain specific activities (like soliciting your clients) rather than trying to restrain an entire geographic market.

4. Use “Cascading” Restraints Where Appropriate

You’ll sometimes see restraints drafted in “tiers” (for example: 12 months / 6 months / 3 months, and Australia / State / 10km radius). The idea is that if a broader option is found unreasonable, a narrower option may still be enforceable.

This approach can help, but it needs to be carefully drafted and fit the contract and relationship. Whether cascading clauses are effective can also depend on the jurisdiction and how the clause is written.

5. Don’t Treat Restraints As Your Only Protection

A common small business mistake is relying heavily on a restraint clause while neglecting other protections that can be easier to enforce in practice.

For example, if you’re engaging a contractor, it often matters just as much that you have:

• clear deliverables and ownership terms in your Service Agreement
• strong confidentiality and IP protections
• well-managed access to systems (permissions, passwords, admin rights)

A restraint is only one piece of your risk management toolkit.

How To Improve The Chances Your Restraint Of Trade Will Hold Up

Enforceability isn’t just about “having a clause” in your contract. It’s about designing a restraint that makes sense for your business and documenting the relationship properly.

Start With The Role: Who Are You Trying To Restrain, And Why?

Before drafting, ask:

• Did this person have access to sensitive information (pricing, strategy, product roadmap, financials)?
• Did they manage key customers or build strong customer relationships on your behalf?
• Would it harm the business if they set up a competitor immediately?

If the honest answer is “not really”, a heavy restraint may be hard to justify and could be a distraction from better protections (like confidentiality obligations).

Make Sure The Contract Terms Support The Restraint

Restraints are usually read in the context of the whole agreement. If your contract is vague about duties, territory, or what constitutes confidential information, that can create ambiguity later.

It’s often better to ensure the contract properly defines things like:

• what your “business” is (services, products, markets)
• what “confidential information” includes
• what “clients” means (current, prospective, clients dealt with in last X months)

Depending on what you’re trying to protect and the relationship, a tailored restraint clause may sit alongside a broader Non-Compete Agreement structure (or a non-compete clause).

Back It Up With Confidentiality (And Use NDAs Wisely)

In many disputes, the real issue isn’t competition itself - it’s the use of confidential information or customer connections.

If you’re sharing sensitive information with someone before engaging them (or while negotiating a partnership), a Non-Disclosure Agreement can help set expectations and show that the information was treated as confidential from the beginning.

In ongoing relationships, confidentiality clauses in the main contract are also critical. NDAs are useful, but they’re not the only tool.

Be Ready To Act Quickly If There’s A Breach

If a key person leaves and starts approaching your customers, timing matters. Delay can make it harder to protect your business, and it may weaken your position if you later try to enforce the restraint.

From a practical standpoint, you’ll want to know in advance:

• who owns key customer relationships (and how they’re recorded in your CRM)
• what access your departing employee/contractor has to systems
• what your internal offboarding process is

This is also why it’s important your contracts are clear and consistent across roles, rather than negotiated ad hoc as you scale.

Key Takeaways

• Restraints of trade can help protect your small business or startup, but they need to be aimed at legitimate interests (not just blocking competition).
• In Australia, restraints are more likely to be enforceable when they are reasonable in time, geography, and scope, and when they match the person’s role and access.
• Restraints commonly appear in employment, contractor, founder, and business sale arrangements, and they should be tailored to each situation.
• Narrower restraints (like non-solicitation and confidentiality) are often more defensible than broad “no competition” clauses.
• Your contracts should work as a system: restraints are stronger when supported by well-drafted core documents (like an Employment Contract or Service Agreement) and good confidentiality practices.

This article provides general information only and does not constitute legal advice. If you’d like help putting the right restraints of trade in place (or reviewing your existing clauses), reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.