Alex is Sprintlaw's co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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If you’ve ever hired a key employee, engaged a contractor, or bought a business, you’ve probably worried about what happens when that relationship ends.
Will they take your customers? Will they set up shop down the road? Will your confidential know-how become their new competitive edge?
This is where restraint of trade clauses come in. And more specifically, it’s where the concept of a restraint area becomes crucial.
A restraint of trade clause can be a powerful tool for protecting your business. But in Australia, it needs to be drafted carefully. A restraint that’s too broad (especially on the restraint area) is more likely to be challenged and found unenforceable. A restraint that’s too narrow may not protect you at all.
Below, we’ll break down what a restraint area is, why it matters, how Australian courts look at enforceability, and practical drafting tips for small business owners.
What Is A “Restraint Area” In A Restraint Of Trade Clause?
A restraint area is the geographic boundary that limits where a person can compete with your business after leaving.
In plain English, it answers the question: “Where can they not compete?”
The restraint area usually appears alongside:
- a restraint period (how long the restriction lasts), and
- a restraint scope (what activities are restricted, such as soliciting clients, providing similar services, or operating a competing business).
Typical restraint area examples include:
- a radius from a specific location (e.g. “within 5km of the business premises”)
- a suburb or postcode
- a city or metropolitan area
- a state (e.g. NSW)
- Australia-wide (more common for online businesses or national operations, but harder to justify)
Why The Restraint Area Is Often The Weak Point
For many small businesses, the restraint area is where disputes arise because it’s easy to overreach.
For example, if your business primarily serves local customers in one suburb, a restraint area covering all of Australia will usually look excessive. Even if your intention is simply “please don’t compete with us,” courts focus on whether the restriction is reasonable for protecting your legitimate business interests.
Restraint Area vs “Customer-Based” Restraints
It’s also worth knowing that some restraints protect you without relying heavily on geography.
For example, a clause preventing someone from soliciting or dealing with your clients (or clients they worked with) may be easier to justify than a broad restraint area. Often, the strongest contracts use a mix of:
- confidentiality obligations
- non-solicitation of clients and staff
- a carefully tailored restraint area (where it’s genuinely needed)
Are Restraint Of Trade Clauses Enforceable In Australia?
They can be, but not automatically.
In Australia, restraint of trade clauses are generally treated with caution. The core idea is that people should be free to work and run a business, unless there is a reasonable restriction that protects a legitimate interest.
That means you can’t use a restraint clause simply to prevent competition for the sake of it.
What Courts Usually Ask
When deciding whether a restraint is enforceable, courts commonly look at:
- What legitimate business interest are you protecting? (e.g. confidential information, client connections, goodwill)
- Is the restraint reasonable? in time, scope and restraint area
- Is it no more than necessary? to protect the interest
- What was the person’s role? (senior employee vs junior staff member, key contractor vs ad-hoc service provider)
- What is the nature of the market? (local vs national vs online)
Put simply: the more influence someone had over your customers, pricing, strategy or confidential systems, the more likely a well-drafted restraint will be considered reasonable.
Different Contexts, Different Expectations
Restraint clauses often appear in:
- employment contracts (for key employees)
- contractor agreements (particularly where contractors deal directly with your clients)
- business sale agreements (where a seller is restrained from competing with the buyer)
Courts tend to be more open to restraints in a business sale context because the buyer is paying for goodwill, and the seller’s competition could quickly destroy the value of what was purchased.
In employment and contractor relationships, courts will still enforce reasonable restraints, but they’ll scrutinise them closely.
How Do You Choose A Restraint Area That Will Hold Up?
If you’re drafting a restraint of trade clause, the restraint area should reflect your real operating footprint, not your worst-case fears.
A good approach is to work backwards from your business reality:
- Where are your customers located?
- Where do you actually deliver services?
- How far will customers realistically travel for what you sell?
- Is the business mainly local, or is it online/national?
- Does the person have influence over customers across multiple locations?
Local Service Businesses (The Classic Restraint Area Scenario)
If you run a local service business (such as allied health, beauty, trades, fitness, professional services, or a bricks-and-mortar retail business), your restraint area often needs to be tightly linked to the service radius.
For example:
- A physiotherapy clinic in one suburb might justify a restraint area of a few kilometres.
- A home services business operating across a city might justify a larger radius or “Greater Sydney / Greater Melbourne” style area.
If the restraint area is much larger than where you actually compete, that’s where enforceability can fall apart.
Online Businesses (Where Geography Gets Tricky)
If your business is online (ecommerce, SaaS, digital services), geography may not reflect how you actually compete. Customers can be anywhere.
In these cases, you may focus more on:
- restricting solicitation of your clients (rather than a broad restraint area), and
- protecting confidential information through strong confidentiality and IP provisions
That said, a restraint area can still matter for some online businesses, especially where staff are building relationships in a particular region or where the business has a strong presence in certain markets.
Multi-Site Businesses
If you operate from multiple locations (or you plan to expand), you may need the restraint area to reflect that.
But this doesn’t mean “Australia-wide” is always the answer.
A common drafting strategy is to use cascading restraint areas (for example, 2km, 5km, 10km), so if the widest area is considered unreasonable, a narrower one may still be enforceable.
Common Mistakes That Make A Restraint Area Unenforceable
Restraint clauses often fail not because restraints are “illegal” as a concept, but because they’re drafted in a way that courts consider unreasonable or unclear.
1. Setting A Restraint Area That Is Wider Than Your Actual Market
This is the most common issue.
If your customer base is local, the restraint area should generally be local. If you genuinely service statewide or nationally, you may be able to justify a wider area, but you’ll want the contract to reflect the commercial reality.
2. Using A “One-Size-Fits-All” Clause For Every Role
Your junior admin employee and your head of sales do not create the same risk to your business when they leave.
When restraints are applied across the board (with the same restraint area and restraint period), it’s easier for an ex-employee to argue the clause is unreasonable.
A tailored employment agreement can help here, especially where the restraints reflect that person’s seniority and access. Having a properly drafted Employment Contract is often the starting point.
3. Vague Or Confusing Geographic Descriptions
If the restraint area is unclear, you may struggle to enforce it.
Examples of “unclear” drafting can include:
- references to “nearby areas” without a definition
- incorrect suburb names or outdated business addresses
- using a radius without specifying the measurement point (e.g. “5km from what?”)
Clear drafting matters, especially if you ever need to seek an injunction quickly.
4. Overreaching On Scope (Not Just Area)
Even if the restraint area is reasonable, the restraint can still be unreasonable if it tries to stop too many things.
For example, preventing someone from working in any capacity in an entire industry may go too far. A more targeted approach might restrict them from:
- providing services that directly compete with your offerings
- approaching specific client categories
- using or disclosing confidential information
As a small business owner, it’s usually better to focus on the actual risk: loss of clients, staff poaching, and leakage of confidential information.
Practical Ways To Make Your Restraint Clause Stronger (Without Overdoing It)
If your goal is to protect your customer relationships and your business value, you’ll usually get better results from a well-balanced clause rather than the harshest possible one.
Use “Cascading” Options For Area And Time
A common drafting method is to include multiple options for the restraint period and restraint area (often written as tiers), so that if a broader option is found unreasonable, a narrower one may be more likely to be upheld. Whether and how this works can depend on the drafting and the circumstances.
For example:
- 12 months / 6 months / 3 months
- 10km / 5km / 2km
This can be a practical way to improve enforceability while still giving you meaningful protection.
Pair Restraints With Strong Confidentiality Protections
In many disputes, your strongest protection is not the restraint area. It’s the clause that prevents misuse of confidential information.
This can include your:
- customer lists
- pricing models
- internal processes and templates
- trade secrets and product roadmaps
- supplier arrangements
Restraints work best as part of a broader contract framework rather than being the only protection you rely on.
Think About How You’ll Prove Your “Legitimate Interest”
If you ever need to enforce the restraint, you may need to show evidence of what you’re protecting.
That means it helps to have good business hygiene, such as:
- documented customer allocation (who managed which client)
- access controls for confidential documents
- clear role descriptions (especially for senior staff)
- written policies around information security
Even if you never end up in a dispute, these practices make the restraint clause feel more “real” and reasonable.
Don’t Forget The Rest Of Your Legal Setup
Restraints are one part of protecting your business, but they’re most effective when your foundations are solid.
Depending on how your business is structured, you might also need documents that clarify ownership and decision-making (so issues don’t escalate when someone exits). For example, if you operate through a company, a Company Constitution is often part of that baseline setup.
When Do You Need Restraint Clauses (And What Documents Should They Be In)?
If you’re wondering whether you actually need restraints, it helps to ask a simple question:
If this person left tomorrow, could they realistically damage the value of my business?
If the answer is “yes,” restraint clauses are worth considering.
Employment Agreements
Restraints are commonly included in senior or customer-facing employment agreements, particularly where the employee:
- has strong client relationships
- is involved in strategy, pricing, or product development
- has access to confidential information that would be valuable to a competitor
It’s generally better to include restraints upfront in your employment documentation than to scramble after resignation. A tailored Employment Contract will usually cover restraints, confidentiality, IP ownership, and other exit-related issues in one place.
Contractor Agreements
Contractors can pose similar risks to employees, especially if they:
- operate under your brand
- deal directly with your customers
- have access to your systems, templates, or internal playbooks
In those cases, your contractor agreement should usually address confidentiality, non-solicitation, and an appropriate restraint area (if required for your particular model).
Business Sale Agreements
If you’re buying a business, restraints are often a key part of protecting what you’re paying for.
You’re not just buying equipment or stock. You’re usually buying goodwill and client relationships, and you want confidence the seller won’t start competing immediately.
This is where having the transaction properly documented matters, including an Asset Sale Agreement (or the right structure for the deal) and carefully drafted restraints covering both period and restraint area.
Customer And Supply Contracts (Less Common, But Sometimes Relevant)
Restraints in customer contracts can sometimes be used (for example, where a customer tries to poach your staff or contractors), but they need to be handled carefully. Often, other contract mechanisms are more appropriate than trying to impose a broad restraint area on customers.
If you sell online or collect personal information, it’s also a good time to check your customer-facing legal documents are in good shape, including a properly drafted Privacy Policy.
Key Takeaways
- Restraint area means the geographic boundary where a person is restricted from competing after leaving your business, and it’s a major factor in whether a restraint of trade clause is enforceable.
- In Australia, restraint clauses can be enforceable, but only if they protect a legitimate business interest and are reasonable in time, scope, and restraint area.
- A restraint area that’s wider than your actual customer market is a common reason restraints get challenged or struck out.
- Cascading restraint areas (and time periods) can help improve enforceability by giving narrower, more reasonable fall-back options, depending on how the clause is drafted and the circumstances.
- Restraints work best when paired with strong confidentiality and well-drafted agreements, such as an Employment Contract or contractor agreement.
- If you’re buying a business, restraints (including restraint area) are often critical for protecting the goodwill you’re paying for.
Note: This article provides general information only and does not constitute legal advice. For advice about your specific situation, you should speak with a lawyer.
If you’d like help drafting or reviewing restraint of trade clauses (including getting the restraint area right for your business), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
