Restraint of trade provisions can serve as an important mechanism for business owners to protect their business assets, customer databases, business know-how and trade secrets, both in situations where these were developed by the company or acquired from another party. A commonly repeated criticism is that such provisions, being difficult to enforce, are not worth including in contractual arrangements. As the recent decision of the Full Court of South Australia (the Court) in Richmond v Moore Stephens Adelaide Pty Ltd  SASCFC 147 confirms, reasonable restraint clauses are indeed enforceable and crucial.
In this decision, an accountant (Mr Richmond) agreed to sell his accountancy practice, including its customer database, to Moore Stephens Adelaide Pty Ltd (Moore Stephens). In order to prevent Mr Richmond from using the customer database after the sale, the parties agreed to include a restraint of trade provision in the business sale agreement whereby Mr Richmond would be prevented from soliciting business from the practice’s clients with whom he had previous dealings. The provision was “cascading”, meaning that it would operate for an ascending period of up to three years within ascending areas up to Australia. This drafting allows for the enforcement of a lesser period or area, if the court holds a higher period or greater area to be unreasonable and unenforceable.
Mr Richmond asserted that he was not bound by the restraint of trade provision because Moore Stephens had not paid the entire purchase price for the business to Moore Stephens in breach of his obligations. The Court disagreed and held that the restraint of trade clause was reasonable and protected the legitimate interest of Moore Stephens. In addition, the fact that the entire purchase price had not been paid by Moore Stephens did not change the Court’s findings.
The decision in Richmond’s case serves as a timely reminder that restraint of trade provisions are enforceable and potentially crucial, even in circumstances where one party does not fully comply with its obligations under the same agreement.
For more information on this topic please contact Baybridge Lawyers on 02 9232 3511 or firstname.lastname@example.org.
Maarten Bollin, Foreign Legal Associate
Maarten Bollin is Foreign Legal Associate at Baybridge Lawyers. Maarten has been admitted to the Amsterdam Bar Association in the Netherlands and is currently awaiting admission to the Supreme Court of New South Wales. He has vast experience is dealing with a wide variety of clients on various corporate and commercial matters, including drafting and negotiating franchise, distribution and manufacturing agreements. In addition, Maarten regularly deals with retail leases throughout Australia and disputes between franchisors and franchisees.
Phone: 02 9232 3511