Restraints – are they worth the paper they’re written on?

Written by Sarah Jones

We often hear frustration from clients, whether as a result of past experience or general business practise, when considering restraint clauses. In particular, there is a view that drafting, negotiating and/or enforcing restraint clauses is more trouble than it’s worth.  

What are restraint clauses?

A restraint clause is a part of a contract that limits what someone can do during or after the agreement ends, usually to protect a business’s interests. For example, it might stop an employee from working for a competitor or contacting clients for a certain time or in a specific area after leaving a job. These clauses must be reasonable in terms of time, location, and what activities are restricted, and are only enforceable if they fairly protect genuine business interests. If a restraint is too broad or unfair, it may not be upheld.

What kind of transactions or contexts would you usually see restraint clauses arise?

1. Business Sales
   
   
   • You may see or seek a restraint clause in a business sale contract – the restraint usually restrains the seller and, if the seller is a company, the relevant key people at the seller.Restraints in business sales are enforceable if they are reasonable and protect the goodwill of the business sold.
   • Section 51(2)(e) of the Competition and Consumer Act 2010 (Cth) provides an exception for restraints in business sales that protect goodwill.
     
2. Share Sales
   • You may also see or seek (as a seller) a restraint clause in a share sale agreement. Again, the restraint would be in respect of the seller and if the seller is a corporate entity, key people / directors of the seller entity.
   • Restraints in share sales are assessed similarly to business sales, with a focus on protecting the value of the target business.
   • Courts generally take a less rigorous view of restraints in share sales compared to more personal agreements like employment agreements.
     
3. Employment Agreements
   • Employers will often include a restraint clause in an employment agreement to restraint an employee from contacting clients or staff during a certain period post-employment.
   • Restraints in employment agreements are scrutinised more strictly and must protect a legitimate interest of the employer, such as confidential information or client relationships.
   • Restraints must be reasonable in scope, time, and geography.
     

What is relevant when you’re asking for or negotiating a restraint clause?

You must consider what interest you are seeking to protect when drafting and negotiating a restraint clause. Restraints should be narrowly tailored to protect specific legitimate interests.

For instance, if you own and operate a café, it would likely not be considered reasonable and required to protect business interests if you seek to restrain any employee from working in Australia for five years in any industry. However, if you sought instead to restrain an employee from opening a business directly in competition with you within 5 kilometres of your business premises for 6 months, that is much easier to justify by reference to the protection of legitimate interests.

Further, cascading clauses can enhance enforceability by providing alternative restraint terms if broader terms are deemed unenforceable. A cascading clause might look like:

Restraint Period means:

• 3 years after the Completion Date;
• 2 years after the Completion Date;
• 1 year after the Completion Date.

Finally, restraints should be clearly defined in terms of geography, time, and scope to avoid ambiguity.

What are some limitations on restraint clauses and their enforceability?

1. Overbreadth
   • Restraints that are too broad in scope, time, or geography are likely to be unenforceable. For instance, in Petersville Ltd v Peters (WA) Ltd the court found that a 15-year restriction on the sale of ice cream in Western Australia was unreasonably broad because it went beyond what was necessary to protect the goodwill acquired in the sale and was found to restrict competition unfairly. A similar finding against overbreadth was made in Perpetual Ltd v Maglis where the Court held that a claim for enforceability of restraint in respect of all related entities of the employer (in circumstances where the employer had significant related entities and they had not been defined in the agreement) was too broad.
2. Public Policy
   • Restraints must not be contrary to public policy. Restraints that unduly restrict an individual’s ability to earn a livelihood may be deemed unenforceable. For example, in the case of Tullett Prebon (Australia) Pty Ltd v Purcell , restraint clauses that sought to prevent the respondent from seeking competitive employment or soliciting customers beyond six months were held unreasonable.
3. Context-Specific
   • Employment restraints are also subject to stricter scrutiny than those in business or share sales. Courts are less likely to enforce broad restraints in employment agreements. In the case of Synavant Australia Pty Ltd v Harris which related to a share sale and an employment arrangement, the restraint clause in a share acquisition agreement was valid for up to three years, but any period exceeding that was deemed unreasonable and void, but the employment-related restraint clause for over six months (being a much shorter period) was also void.

What are some examples of restraint clauses which have been upheld in Australia?

1. Business Sales
   • In the case of TSV Holdings Ltd v Evans, the court upheld a restraint clause in the context of a business share sale. It found that such a clause was reasonable to protect the purchaser’s investment and the goodwill acquired through the transaction and that the clause appropriately prohibited the seller from soliciting customers for their competing business.
2. Share Sales
   • In the recent 2026 case of Nelson Alexander Pty Ltd v Kardamitsis the severability clause within the restraint was applied, allowing valid parts of the restrictions to remain upheld. This is good law to support the inclusion of cascading provisions in restraints. However, it should be noted that excessive geographic and temporal scopes were struck down.
3. Employment Agreements
   • In the case of Just Group Ltd v Peck a restraint clause was upheld for six months post-employment. It limited the employee from joining a competitor and using confidential information, which the court found reasonable and necessary to protect customer connections and goodwill. A similar finding was made in the case of Janala Pty Ltd v Hardaker (No 3) where the six month period of restraint on an employee was upheld as necessary to protect the company’s legitimate business interests.

Conclusion

It is true to say that there is a high bar for enforcement of restraints, and certain commercial realities based on the facts and context of each matter will be relevant. However, it is also true that restraints can be highly effective and genuinely enforceable in the right circumstances.

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[1] (1999) 160 ALR 359.

[2] [2025] QSC 071.

[3] (2008) 175 IR 414.

[4] [2001] FCA 1517.

[5] [2008] VSC 157.

[6] [2026] VSC 74.

[7] (2016) 344 ALR 162.

[8] [2023] NSWSC 446.