Deed of restraint, what it is and when Australian courts enforce it

A deed of restraint is a formal written agreement in which one person promises to limit their commercial activities after a particular relationship ends. The two situations you will most often see it in are the sale of a business, where the seller agrees not to compete with the buyer for the goodwill the buyer just paid for, and the departure of a key employee, who agrees not to compete, poach clients, or use confidential information for a period after they leave.

This article explains what makes a restraint a deed rather than an ordinary contract clause, the test Australian courts apply to every restraint of trade, and how the same restraint can be perfectly enforceable in one context and worthless in another. It also covers cascading clauses, the common misconceptions, and when legal help is worth the cost.

Why a deed instead of a contract clause

Most business agreements are ordinary contracts, which means they are only enforceable if each side gives something in exchange, a requirement lawyers call consideration. A deed is different. It is a formal written document executed with specific formalities, and at common law a deed is binding without consideration.

In New South Wales, s 38 of the Conveyancing Act 1919 (NSW) requires a deed to be signed and attested by at least one witness who is not a party to it. Other states have equivalent deed rules. The key practical point is that a deed creates binding obligations on its own.

That matters because a restraint is often imposed when there is no payment for the promise. A departing senior employee who is not being paid anything extra has no obvious reason to promise not to compete, so there is no consideration for that promise in an ordinary contract. Executing the restraint as a deed fixes that problem. The same logic applies to a former partner or consultant who leaves without a payout. Where real money is changing hands, such as in a business sale, the restraint can sit inside the sale agreement because the sale price is the consideration; the deed form is used when there is no such payment.

The legal test: restraint of trade is void unless reasonable

This is where most restraint deeds come unstuck. At common law, any agreement that restricts a person's freedom to carry on their trade or business is presumed void unless it is reasonable. The High Court confirmed the doctrine applies in Australia in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd [1973] HCA 40, and it applies just as much to a deed as to an ordinary contract.

A restraint is reasonable only if it protects a legitimate interest of the business relying on it and goes no further than reasonably necessary to protect that interest. The New South Wales Court of Appeal set out the interests that qualify in Belflora Pty Ltd v Vinflora Pty Ltd [2021] NSWCA 178: confidential information and trade secrets, goodwill including customer connection, and connection with staff, which is why restraints on poaching employees can be valid. The same case confirms what does not qualify: protection from ordinary competition. If a clause exists mainly to stop someone competing, it is against public policy and will not be enforced.

Reasonableness is assessed at the time the parties entered the agreement, not with the benefit of hindsight: Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267. So the question is whether the restraint looked reasonable when it was signed, not whether events later showed it was needed.

The same restraint, two very different outcomes

Belflora also drew the distinction that explains most of the difference in outcomes between cases. Courts take a less rigorous view of restraints in commercial agreements for the sale of goodwill than of restraints between employer and employee. A seller has been paid for the goodwill and should not be allowed to compete for it straight away, so the buyer's interest in the goodwill it purchased is treated as a strong legitimate interest. An employer's restraint on a former employee faces closer scrutiny, because the law treats the employee's freedom to earn a living as a matter of public interest.

A typical deed of restraint sets out five things:

• The restrained person: the former owner, employee, director, partner or contractor who is bound.
• The restrained activities: working for or setting up a competitor, soliciting customers, poaching staff, and using or disclosing confidential information.
• The restraint period: how long the restrictions run, commonly six to twenty-four months in employment and longer in a business sale.
• The restraint area: where the restrictions apply, from a few kilometres to a state or the whole country.
• The consequences of breach: damages, an injunction to stop further breaches, and sometimes the restrained person's legal costs.

The period and area are only reasonable if they match the interest being protected. A restraint aimed at client relationships needs to cover the area where those clients actually are. A restraint aimed at confidential information may need no area at all, just a period.

A worked example

Suppose Maria sells her florist business in inner Brisbane for $380,000. The sale agreement includes a deed of restraint under which Maria agrees not to carry on or be involved in any florist business within 10 kilometres of the shop for three years, and not to solicit the shop's customers or staff during that period. The buyer is paying for the business's goodwill, so Maria's promise protects a legitimate interest the buyer has genuinely paid for. If Maria opens a rival flower stall two blocks away and starts emailing the old customer list, the buyer can point to a clear breach, seek an injunction, and recover damages.

Now change the facts. The same 10-kilometre, three-year restraint is included in the employment contract of the shop's junior delivery driver, who handles no client relationships and learns nothing confidential. A court will almost certainly refuse to enforce it. The restraint is far wider than anything needed to protect the shop's interests, and its real effect is to stop the driver earning a living in their trade. The clause is not better because it is tougher; it is void because it is unreasonable. This is why restraint deeds cannot be copied from one business to another and expected to work.

Cascading clauses and restraints that are too wide

If a court finds a restraint unreasonable, the usual common law position is that the whole clause fails. Courts will not rewrite an over-broad restraint into something more sensible. The drafting response is the cascading clause: a series of separate and independent restraints, each pairing a different period with a different area, set out from the widest down to the narrowest. If the court strikes out the wider restraints, the narrower ones survive.

The New South Wales Court of Appeal upheld exactly this structure in Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267. The post-employment restraint deed contained a cascade of nine separate restraints, from 15 months across Australia down to 12 months in the Sydney metropolitan area, and the court enforced a 12-month Australia-wide restraint. Each restraint was a separate covenant capable of being understood and complied with on its own, and there was no requirement for a mechanism to say which one operated first.

New South Wales has an additional rule. Under s 4(1) of the Restraints of Trade Act 1976 (NSW), a restraint is valid to the extent to which it is not against public policy, whether it is in severable terms or not. That lets a NSW court enforce the reasonable part of a single over-broad restraint rather than striking it out entirely. Outside New South Wales, the common law position is more rigid, which is why the cascade has to do the work in the drafting.

Where statute law fits

Restraint of trade is mostly judge-made law, but statute touches it at the edges. Section 4M of the Competition and Consumer Act 2010 (Cth) preserves the operation of the common law of restraint of trade alongside the Act's prohibitions on anti-competitive agreements. In practice this means a standard restraint deed is assessed under the common law reasonableness test rather than treated as a prohibited anti-competitive arrangement.

Where the restraint sits inside a business sale, the Australian Consumer Law (ACL) also applies. The ACL is Schedule 2 of the Competition and Consumer Act 2010 (Cth), and s 18 of the ACL prohibits misleading or deceptive conduct in trade or commerce. Statements a seller makes about turnover, customers or goodwill during the sale can give the buyer rights under the ACL independently of the restraint clause, and misrepresentations in the sale process can affect how the whole agreement, including the restraint, is treated.

Misconceptions that cost businesses

Three misunderstandings come up again and again:

• A deed is automatically enforceable: The deed form only fixes the consideration problem. The restraint inside it is still judged by the reasonableness test, and an unreasonable restraint in a deed fails exactly as an unreasonable clause in a contract does.
• A longer and wider restraint is better protection: The opposite is usually true. A restraint that goes beyond protecting a legitimate interest is void, which means no protection at all. A narrower restraint that a court will enforce is worth more than a broad one that collapses.
• The court will trim an over-broad restraint to something reasonable: In most of Australia the common law does not allow this, which is why cascading clauses exist. New South Wales is the exception, where the Restraints of Trade Act 1976 (NSW) allows a court to enforce a restraint to the extent it is not against public policy.

When legal help is worth it

Restraint deeds are one of the few documents where getting it wrong can mean losing protection entirely at the moment you need it most. A commercial lawyer will start by identifying the legitimate interests actually at stake, which is the whole foundation of a valid restraint. From there the work is calibration: matching the period, area and activities to the role or the sale, building a cascade that leaves the court enforceable options, and applying the rules that differ between states, such as the Restraints of Trade Act 1976 (NSW). If a dispute has already started, a lawyer can move quickly for an injunction to stop a departing employee or seller doing damage while the matter is resolved. A review of an existing deed is also worthwhile, because clauses that look strict on paper may be the ones most likely to be struck out.

The question to answer before you rely on a deed

Before signing or relying on a deed of restraint, ask the question a court will ask first: what legitimate interest is this restraint protecting, and how wide does it genuinely need to be to protect it? If the honest answer is that you simply do not want the other person competing, the clause is on shaky ground and may give you nothing. If the answer is that the restraint protects customer relationships, confidential information or goodwill you have paid for, you have a clause a court may well enforce. Restraint deeds are powerful because they are precise; they stop working when they reach beyond the interest they exist to protect. That precision is exactly where a lawyer earns their fee.