A ten-year ban on working in the industry you know best sounds like the kind of clause no court would ever enforce. In Devil Dog Pty Ltd v Cook, decided by the Supreme Court of Western Australia in early 2017, a court did enforce exactly that, at least on an interim basis. A man who sold his hydraulic engineering business for $650,000 was stopped from competing with it, anywhere in Western Australia, for a decade. The judge was candid that the period sat at the outer edge of what could be considered reasonable, yet the injunction was still granted. The case is a vivid demonstration of how differently the law treats restraint of trade in the sale of a business compared with restraint in an employment contract, and why both buyers and sellers need to understand the clause before the contract is signed.
What happened in Devil Dog v Cook
Cook owned and ran Matchtec Hydraulics, a Perth business that manufactured, serviced and repaired hydraulic cylinders for clients across the state, from the Perth metropolitan area to regional Western Australia. In 2014 he sold the business to Devil Dog Pty Ltd for $650,000, of which $588,700, roughly 90 per cent of the price, was allocated to goodwill.
The sale included a deed of restraint. Cook agreed not to engage in any business similar to Matchtec Hydraulics, not to accept business from Matchtec's clients, and not to interfere with Devil Dog's relationship with those clients, for ten years within Western Australia. Cook continued to work in the business after the sale, and his resignation took effect on 30 June 2016. In July 2016 he began working for a competing hydraulic engineering business. Devil Dog applied to the court for an injunction to stop him, and the application came before Justice Tottle in Devil Dog Pty Ltd v Cook [2017] WASC 27.
Cook's position was never strong. He had signed the deed of restraint without legal advice, apparently because he planned to return to the United Kingdom at the end of 2016 and had not paid close attention to the document. The application was interlocutory, so the court was not finally deciding whether the restraint was reasonable. It was deciding whether Devil Dog had a sufficiently arguable case and whether the balance of convenience favoured an injunction while the dispute ran its course.
When is a restraint of trade reasonable?
A restraint of trade is a promise by one party, the covenantor, to another party, the covenantee, to restrict the covenantor's freedom to carry on trade with people who are not parties to the contract. That is the definition adopted by the English Court of Appeal in Petrofina (Gt Britain) Ltd v Martin [1966] Ch 146 at 180, and it covers everything from an employee's non-compete to a business seller's promise not to re-enter the same market.
At common law a restraint of trade is prima facie void because it is contrary to public policy. The party seeking to enforce it must justify it by showing that it is reasonable. The classic statement of the test comes from the House of Lords in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535, where a seller of an armaments business was held to a worldwide, 25-year restraint because the market had very few customers and the buyer had paid handsomely for the goodwill. A restraint is reasonable, Lord Macnaghten said, when it is reasonable in reference to the interests of the parties and reasonable in reference to the interests of the public, framed so as to afford adequate protection to the party in whose favour it is imposed while in no way injurious to the public. In weighing that question, courts look at the activities the restraint covers, the geographical area it covers, and how long it lasts.
Lord Macnaghten also described the public interest argument against restraints in memorable terms: the seller who is bound too tightly has, in effect, committed industrial suicide, unable any longer to earn a living at the trade he has made peculiarly his own. In Nordenfelt that argument failed. In Devil Dog the court had to weigh a version of it against the buyer's interest in protecting what it had paid for.
The key point for Australian business owners is that restraints in the sale of a business are treated far more leniently than restraints in employment contracts. An employer's legitimate interests are usually limited to confidential information and client connections, and employment restraints are enforced for months rather than years. In a business sale the buyer has paid for the goodwill, and a restraint that protects that purchased goodwill is much easier to justify. Courts regularly accept periods that would be unthinkable in an employment context.
On the injunction application, Justice Tottle accepted that Devil Dog had a prima facie case that the restraint was reasonable. Western Australia was a defensible area because Matchtec's clients were spread across regional WA and the Perth metropolitan area. Ten years was defensible, at least at that stage, for three reasons: about 90 per cent of the purchase price was allocated to goodwill, which indicated repeat business and customer loyalty; Cook had a strong personal connection with Matchtec's customers; and the parties had negotiated the restraint at arm's length in a commercial transaction, so it was not imposed by a stronger party on a weaker one.
The injunction was granted. But the court's reservations were explicit: ten years, the judge said, was at the outer edge of what may be considered reasonable. Because the decision was interlocutory, whether the restraint would survive a final hearing was left open. The case shows both how far a court will go to protect purchased goodwill and where the limits are likely to lie.
Why this matters when you buy or sell a business
The case distils into practical points for buyers and sellers:
- A long restraint is not automatically void: A ten-year non-compete would be extraordinary in an employment contract, but in a business sale a court was prepared to enforce one on an interim basis because the buyer had paid for goodwill.
- The price allocation in your sale contract is evidence: The fact that 90 per cent of the purchase price was allocated to goodwill helped persuade the court that the business ran on repeat customers and loyalty, which is exactly what a restraint protects.
- An injunction can stop you earning a living before your case is heard: Cook had to stay out of the industry while the reasonableness question remained undecided. For a seller, the practical impact of a restraint lands long before any final ruling.
- The seller's own conduct matters: Signing a deed of restraint without legal advice, while intending to keep working in the same industry, is how a restraint becomes a surprise.
- Employment and business-sale restraints are different animals: The clause that fails in an employment contract may hold up in a sale, and a clause drafted for one context may be badly misjudged in the other.
For a buyer, the lesson is that a restraint is only as valuable as the evidence behind it. An unenforceable restraint is a hole in what you paid for: the seller can set up next door and take the clients you thought you had bought. For a seller, the lesson runs the other way. The promise not to compete has real economic consequences, and the price of the business should reflect what is being given up.
The drafting position also varies around the country. In NSW, s 4 of the Restraints of Trade Act 1976 (NSW) allows a court to enforce a restraint to the extent that it is not against public policy, whether or not the clause is severable. Elsewhere the common law applies, and an unreasonable restraint is wholly void unless it can be severed into enforceable parts. Where you are and how the clause is structured can therefore determine whether you get the benefit of the bargain.
What you can change this week
Five actions you can take this week:
- Audit the restraint clauses in your existing contracts: Check the activities, area and duration against what your business genuinely needs to protect, and against what you might have to defend one day.
- If you are buying, document the goodwill allocation: The way the purchase price is split between goodwill, plant and stock becomes evidence of what you are entitled to protect.
- If you are selling, get independent advice before signing: The injunction in Devil Dog shows a seller can be prevented from working in his own trade before any final ruling on reasonableness.
- Draft the restraint in severable layers: A series of separate obligations, each covering a narrower activity, area or period, gives a court something enforceable to hold onto if the outer layers fall.
- Move quickly if a former seller starts competing: Interim injunctions are urgent applications, and delay can undermine the argument for one.
How a lawyer helps you draft a restraint you can enforce
Devil Dog is a case where the clause survived, but only just, and on evidence the parties had largely created for themselves before the dispute arose. A commercial lawyer working on the sale would help on both sides of the table. For a buyer, that means scoping the restraint to the legitimate interests at stake: the customer connections, confidential information and goodwill that the purchase price actually bought. The lawyer would calibrate the activities covered, the area and the duration to those interests, negotiate a price allocation that can be defended in evidence, and draft the restraint so that one unreasonable part does not bring down the whole clause. For a seller, it means valuing what is being given up, negotiating the scope down to what the buyer genuinely needs, and making sure the deed is understood before it is signed.
If a restraint is breached, a lawyer's role shifts to the urgent end of the work. Enforcing a restraint usually means an application for an interim injunction, with the evidence of goodwill, customer connections and loss assembled quickly. Defending one means testing whether the restraint is reasonable, whether it protects a real interest, and whether the court should read it down or sever it. Both sides in Devil Dog could have been better prepared by advice at the contract stage, which is cheaper and far less stressful than arguing about it in court.
The line to remember from Devil Dog
The line to remember is the judge's own: ten years was at the outer edge of what may be considered reasonable. The court enforced the restraint while openly doubting it, because the buyer had paid for goodwill, the seller knew the customers, and the deal was negotiated at arm's length. A restraint of trade is only as strong as the evidence that it protects what was actually paid for, and that evidence is mostly built at the negotiating table, not in the courtroom.
Restraints of trade in commercial contracts are prima facie void but enforceable if reasonable. In a business sale, courts weigh the activities, area and duration of the restraint against the goodwill the buyer purchased, and they accept periods that would never survive in an employment contract. Buyers should document the goodwill allocation and draft severable restraints. Sellers should take advice and understand what they are giving up. The Devil Dog case shows that even a decade-long restraint can be enforced on an interim basis, so both sides should treat the clause as seriously as the price.