Restraint Of Trade Clauses: What They Mean Under Australian Law

If you’re building a business in Australia, you’ll eventually run into the question: what does a restraint of trade clause actually mean?

Maybe you’re hiring your first key employee, partnering with a contractor who will have access to your customer list, or bringing on a co-founder who could leave and set up a competing business. In all of these situations, you’ll likely want some legal protection around your relationships, your confidential information, and your hard-won goodwill.

A restraint of trade clause can help - but it’s also one of the most misunderstood (and most frequently challenged) parts of a contract. If it’s drafted too broadly, you may not be able to rely on it when it matters. If it’s drafted properly, it can be an effective way to reduce risk without being unfair or overreaching.

Below, we break down restraint of trade clauses in plain English, from a business owner’s perspective, and how to use them in a practical, enforceable way. This article is general information only and isn’t legal advice.

What Is A Restraint Of Trade (And Why Do Businesses Use It)?

A restraint of trade is a contractual restriction that limits what someone can do during a business relationship (like employment or contracting), or after it ends.

In practice, it usually aims to stop a person from doing something that could harm your business, such as:

• starting a competing business
• working for a competitor
• approaching your customers, suppliers, or staff
• using your confidential information to benefit themselves (or a rival)

You’ll also hear a restraint of trade referred to as a restriction of trade, or (in employment contexts) a non-compete or restraint clause.

Why it matters for your business: if you’re investing time and money into building a product, brand, team, and customer base, you’re also building value. A restraint of trade clause is designed to help protect that value - especially where someone has had direct exposure to sensitive parts of your business.

That said, restraints are not automatically enforceable just because they appear in a contract. In Australia, courts generally treat restraints cautiously. Enforceability usually depends on whether the restraint is reasonable in the circumstances and whether it protects a legitimate business interest (rather than simply limiting competition).

When Do Restraint Of Trade Clauses Usually Come Up For Startups?

Restraints aren’t only for large corporations. Startups and small businesses often have more to lose, because a single relationship can represent a big portion of revenue or know-how.

Here are some common scenarios where restraints matter from a business perspective.

Employment (Especially Senior Or Customer-Facing Roles)

If you’re hiring someone who will build key relationships, manage strategy, or access pricing and product plans, you may want a restraint that reduces the risk of them leaving and immediately taking those assets to a competitor.

This is commonly drafted inside an Employment Contract, often alongside confidentiality obligations.

Contractors And Consultants

Many startups rely heavily on contractors (developers, marketers, sales consultants, growth agencies). If a contractor is embedded in your business operations or has access to your customer and commercial data, a restraint can help protect you if the relationship ends.

Restraints for contractors need careful drafting, because the relationship is usually less “exclusive” than employment - which can affect what’s considered reasonable.

Co-Founders And Early Team Agreements

Founder departures can be one of the toughest issues for early-stage businesses. If a co-founder exits, you’ll want clarity around what they can do next - especially if they were deeply involved in the business model, product roadmap, customer acquisition, or investor relationships.

These issues are often addressed in a Founders Agreement or (once a company structure and ownership is more settled) a Shareholders Agreement.

Business Sales And Exits

If you ever buy or sell a business, restraint of trade clauses are common because the buyer is paying for goodwill - including customer relationships and the seller’s ability to “hand over” the business without immediately competing.

In sale transactions, restraints can sometimes be broader than in employment, because the commercial context is different (and the seller is typically compensated for agreeing to the restraint).

What Types Of Restraints Should You Know About?

Restraint of trade clauses aren’t one-size-fits-all. As a business owner, it helps to understand the main “types” of restrictions, because each one serves a slightly different protective purpose.

Non-Compete Restraints

A non-compete aims to prevent someone from working in, operating, or being involved in a competing business.

Because this can impact a person’s ability to earn an income, non-competes are often the most scrutinised. If you include a non-compete, it needs to be closely connected to a legitimate business interest (for example, protection of confidential information or client connections) and be no wider than necessary.

In many cases, it’s more commercially realistic to use a targeted non-solicitation clause instead of a broad non-compete.

If you’re considering a specific non-compete clause, it’s worth getting advice early through restraint of trade advice so you don’t end up with a clause that looks strong on paper but fails in practice.

Non-Solicitation Of Clients (And Sometimes Leads)

A non-solicitation restraint usually prevents someone from approaching, canvassing, or dealing with your clients (and sometimes prospective clients) after they leave.

From a small business perspective, this is often the most valuable restraint because it focuses on what you’re actually trying to protect: your revenue and relationships.

It can also be easier to justify as “reasonable” because it’s narrower than preventing someone from working in the entire industry.

Non-Poaching Of Staff

A non-poaching (or non-solicitation of staff) restraint restricts a person from encouraging your employees or contractors to leave and join them.

This can be especially important in niche industries where talent is hard to replace, or where teams move together.

Confidentiality (Often Overlooked, But Critical)

Strictly speaking, confidentiality clauses aren’t always described as “restraints of trade”, but in day-to-day business protection they’re often just as important.

If the real risk is your playbook (pricing, strategy, code, marketing assets, supplier terms), then confidentiality obligations - backed by a well-drafted NDA - can be a strong line of defence.

For early discussions with partners, advisers, or potential hires, a Mutual Non-Disclosure Agreement can help you share information with more confidence.

Are Restraint Of Trade Clauses Enforceable In Australia?

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

Courts generally start from the idea that restraints are against the public interest unless they go no further than is reasonably necessary to protect a legitimate business interest. The key question is usually whether the restraint is reasonable in the circumstances.

While the details depend on the situation, your restraint clause is more likely to be enforceable if:

• There’s a genuine business interest to protect (for example, confidential information, key client relationships, trade connections, goodwill).
• The restraint is proportionate to the person’s role and exposure to your business (a broad restraint for a junior role is generally harder to justify than for a senior sales executive or CTO).
• The time period is reasonable (e.g. a short “cooling off” period can be more defensible than a long prohibition).
• The geographic area makes sense for how your business actually operates (local, state-based, national, or online).
• The activities restricted are specific rather than a blanket ban on working in an entire industry.

It also matters how the clause is drafted. In many business contracts, you’ll see “cascading” restraint clauses (multiple alternative time periods and geographic areas), designed to improve the chance that at least one layer is considered reasonable. However, whether cascading restraints are effective can depend on the jurisdiction and the way the clause is drafted, so it’s important to get this right for your situation.

Important practical point: enforcing a restraint often involves urgency. If a person has started soliciting your clients or using confidential information, you may need to act quickly to protect the position, including seeking legal remedies (such as an injunction and/or damages). That’s why prevention (getting the clause right upfront) is usually far cheaper than reacting later.

How To Draft A Practical Restraint Of Trade Clause (Without Overreaching)

If you’re drafting contracts for your business, it’s tempting to “go broad” and restrain everything - every competitor, every customer, forever.

But in reality, an overly broad restraint can create two problems:

• it may be harder to enforce, because it looks unreasonable
• it can sour negotiations with good candidates, contractors, or co-founders (which can hurt hiring and growth)

A more effective approach is to draft a restraint that targets your real risk points. Here are practical drafting principles many growing businesses use.

1. Be Clear About What You’re Protecting

Ask yourself: what would actually damage your business if this person left?

• Direct customer relationships?
• Pricing strategy?
• Product roadmap, codebase, or technical processes?
• Supplier terms or distribution channels?

Once you know the “why”, you can shape a restraint that aligns with it.

2. Tailor The Restraint To The Role (Not The Title)

Two people can have the same job title but completely different exposure to confidential information and clients.

Restraints should reflect what the person actually does and what they actually know.

3. Use Narrower Tools Where They Work

If your biggest concern is clients being approached, a non-solicitation clause may be enough.

If your biggest concern is your confidential information being reused, strong confidentiality provisions can be central.

Non-compete restraints tend to be the “heaviest” option. They can still be appropriate in some cases, but they’re not always the best first choice.

Where a non-compete is necessary, a standalone Non-Compete Agreement (or a carefully drafted clause within an existing contract) can be a clearer way to set expectations.

4. Think About Time, Geography, And Scope As A Package

Reasonableness often comes down to the combined effect of:

• Time: how long does the restriction last?
• Geography: where does it apply?
• Scope: what activities are restricted?

A broader geographic area might be more reasonable with a shorter duration. A longer duration might be more reasonable if the scope is narrower (e.g. only certain key clients).

What’s “reasonable” will depend heavily on how your business operates. A local café, a national service provider, and a global SaaS startup will have very different risk profiles.

5. Make Sure Your Paperwork Matches Reality

Contracts don’t exist in a vacuum. If you want to rely on restraints, it helps if your business practices support them, such as:

• limiting access to confidential information on a need-to-know basis
• using appropriate security and permissions for systems and files
• clearly documenting which clients and relationships are “yours” as the business (not personally owned by an individual team member)

These steps won’t replace a legal clause, but they can make your position stronger if a dispute arises.

Key Takeaways

• A restraint of trade is a contract clause that limits competitive behaviour (such as competing, soliciting clients, or poaching staff) during or after a business relationship.
• Restraints are common in employment, contractor arrangements, founder relationships, and business sales - especially where someone has access to clients, confidential information, or goodwill.
• In Australia, restraint of trade clauses can be enforceable, but generally only where they protect a legitimate business interest and are reasonable in time, geography, and scope.
• From a business perspective, a targeted non-solicitation clause and strong confidentiality provisions can be just as valuable (and sometimes more enforceable) than a broad non-compete.
• Well-drafted restraints work best when they are tailored to the real risks in your business and aligned with how your business actually operates day to day.

If you’d like help putting the right restraint of trade protections in place for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.