A draft business sale agreement is sitting in front of you, and in it is a clause that says the seller will not compete with the business being sold, will not approach its clients or suppliers, and will not poach its staff, for a set period and within a set area. If you are the seller, this clause decides what you can do with your own working life after settlement. If you are the buyer, it decides whether the goodwill you just paid for stays yours, or whether the seller can quietly rebuild the same business on the strength of it.
The restraint of trade clause does not create the protection. The sale agreement transfers the business, its assets and its goodwill, and the restraint is the provision that stops the seller from taking that goodwill back. It binds the people best placed to do that, usually the seller and the key employees who are not transferring, and it sets the length and the reach of the protection. The catch is that an over-wide restraint is void, not trimmed. The drafting choices below are what separate a clause a court will enforce from one that leaves the buyer unprotected.
What a restraint clause actually contains
Who is bound
A restraint is only as good as the people it catches. In a business sale, the parties who need to be bound are:
- The seller: the entity selling the business, and the individuals behind it. If a company sells, the company is bound by its own signature, but the directors and shareholders who will go on to trade again are not automatically bound. Courts have had to decide whether a director who signed on the company's behalf is also bound personally, as in Findex Group Ltd v McKay [2019] FCA 2129, so the agreement should name the individuals and require them to sign in their own right.
- Key employees: staff who are not transferring with the business often hold the client relationships. A restraint binds them only if they sign the agreement or a separate deed. Courts scrutinise restraints on employees more strictly than restraints on a seller, because an employee still needs to earn a living, so an employee clause needs to be tighter than the seller's.
- Related parties: sellers sometimes route a new venture through a spouse's company or a family trust. The clause should catch any business the seller directs, controls or has an interest in, otherwise the restraint is easily sidestepped.
The trap is the gap between who the buyer thinks is bound and who actually signed. A seller who has not signed personally, or a key employee who was never asked to sign a deed, is simply not caught, and the clause cannot be enforced against them.
The conduct the restraint prohibits
Restraint clauses come in a few standard shapes, and most agreements use more than one:
- Non-solicitation: the seller cannot approach, solicit or deal with the clients, suppliers or staff of the business. This is the workhorse clause. It stops the seller from walking out the door with the customer list.
- Non-competition: the seller cannot carry on, be employed by, or act as a director or contractor of a competing business. This is the broadest and hardest clause to enforce, because it stops the seller earning a living in their own trade.
- Non-dealing: a step wider than non-solicitation. The seller cannot deal with a client of the business at all, even if the client approached the seller first.
- Non-poaching: aimed at staff and contractors rather than customers.
For a buyer, the drafting instinct is to take all of them. The better approach is to match the conduct to the risk. Non-solicitation and non-dealing protect client relationships, which is what most buyers actually paid for. Non-competition is reserved for the seller who personally holds the relationships and the know-how, because a court will not enforce a non-competition clause that goes further than protecting the buyer's interest requires.
How the competing business is defined
The definition of a competing business is where restraint clauses are most often misdrafted. The parties can define it by industry, by a list of named competitors, or by the services the business actually provides. The safest definitions are anchored to the business being sold: a business that provides physiotherapy services in a defined area, rather than a business that provides any healthcare service.
The trap is breadth. A clause that stops the seller from doing anything that could conceivably compete is a clause a court will not enforce, and the seller knows it. If the seller's new venture is not in fact a competing business under a tight definition, the buyer has no claim at all, so precision matters more than reach.
The restraint period
Sale of business restraints are enforced more readily than employment restraints, because the buyer has paid for the goodwill and the seller has been paid for giving it up. Periods of six months to three years are common, and longer periods are sometimes upheld where the goodwill genuinely takes that long to become secure.
Two timing traps matter. First, the period should start on the date that matters, usually completion, and if the seller stays on as a consultant or employee, the parties should decide whether the clock runs during that time. Second, the period should pause while the seller is in breach. A clause that says the period stops running during any breach, and only resumes when the breach ends, is worth far more than a fixed period a seller can burn down by breaching for the last few months.
The restraint area
The area should track where the business actually has customers. A local business with local clients can justify a radius around its premises. A business whose clients are spread across a state can justify a larger area. An Australia-wide restraint on a suburban business will not survive.
The drafting choice is to define the area by reference to the business's real footprint, and to tie it to where the seller could actually damage the goodwill. Areas are usually easier to negotiate down than periods, and a buyer who concedes on area while holding the line on period and conduct is often ahead.
The interest the restraint protects
This is the clause that makes everything else work, even though it rarely looks like a clause at all. At common law, a restraint of trade is presumed void unless the party seeking to enforce it proves it is reasonable. The High Court confirmed in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288 that a restraint is only enforceable if it is reasonable between the parties and consistent with the public interest, drawing on the old formulation that where nothing more appears, the law presumes restraints bad.
The buyer's reasonableness case rests on the goodwill. The buyer paid for the client connections, the confidential information and the know-how, and the restraint is what protects them. In Geraghty v Minter (1979) 142 CLR 177 the High Court treated a restraint given on the sale of a share of a business as part of the goodwill itself, enforceable because the buyer had paid value for that protection. The clause should say what it protects, so that the court can measure the restraint against it. A restraint that protects goodwill will be read differently from one that merely suppresses competition.
Carve-outs and exceptions
Carve-outs are the pressure valves that keep a restraint reasonable:
- Existing clients: the seller can deal with clients they had before the sale, or who are excluded by name.
- Passive holdings: the seller can hold a small shareholding in a listed company that competes, without being treated as carrying on that business.
- Work for the buyer: the seller can be engaged by the buyer as an employee or consultant, which is essential when the seller stays on after settlement.
- New clients: the seller can deal with clients who were never clients of the business.
Without carve-outs, the restraint catches conduct it does not need to catch, and that makes the whole clause look unreasonable. Drafting the exceptions in is not a concession to the seller; it is part of the reasonableness case the buyer will have to make in court.
Severability and read-down
Two mechanisms decide what happens if part of the restraint is invalid. At common law, the blue pencil rule allows a court to strike out the offending words, but only where the clause can be reduced without rewriting it. In NSW, the position is more generous. Section 4 of the Restraints of Trade Act 1976 (NSW) provides that a restraint is valid to the extent it is not against public policy, whether or not it is in severable terms, so a NSW court can enforce the reasonable part of an otherwise over-wide clause.
There is an important limit. The same section lets a court declare the restraint altogether invalid where the person who drafted it manifestly failed to attempt to make it reasonable. In other words, the NSW read-down rescues a clause that is reasonable in part, but not a clause that was never calibrated at all. Outside NSW the read-down does not apply, so the clause should be drafted to be enforceable on its own terms, with severability treated as a backstop rather than a plan.
Remedies for breach
If the seller breaches, the buyer's remedies are the usual contract remedies, applied in a specific order. An injunction is the primary weapon, because money is a poor substitute for a client that has already moved. Courts grant injunctions in aid of restraints of trade, as in Thinkstorm Pty Ltd v Farah [2017] NSWSC 11, where the Supreme Court of NSW enforced a 12-month restraint by injunction, and Tyro Payments Ltd v Kounta Pty Ltd [2023] NSWSC 1384, where an injunction was granted in a commercial context. An interlocutory injunction can be obtained quickly, but it requires the buyer to show a serious question to be tried and that damages would not be an adequate remedy.
Damages for breach of contract are available, but quantifying lost goodwill is notoriously difficult. Practically, the buyer should be ready to act fast: send a letter putting the seller on notice and seeking an undertaking, and apply for an injunction promptly, because delay undermines the urgency argument. The clause should also deal with costs, so that the seller bears the buyer's enforcement costs if the breach is established.
Optional clauses worth asking for
Beyond the core clauses, several additions are worth considering depending on the deal:
- Restraint on the buyer: if the seller keeps assets or a related business after the sale, a clause stopping the buyer from competing with what the seller retained can be as important as the buyer's own restraint.
- Assignment on resale: the benefit of the restraint should pass to a future buyer of the business, so that the protection follows the goodwill if the buyer later sells. The High Court in Geraghty v Minter treated the benefit of a restraint as running with the goodwill, and an express assignment clause removes any doubt.
- Tolling on breach: the restraint period pauses while the seller is in breach, so a seller cannot run out the clock by breaching.
- Release on payment: a negotiated amount the seller can pay to be released from the restraint early, which gives the seller an exit and the buyer a guaranteed payment.
- Non-disparagement: a clause stopping the seller from criticising the business to clients or staff, which protects the goodwill the restraint is meant to preserve.
How an Artificer Legal lawyer would review your restraint clause
When a business sale agreement comes to us, the restraint clause is usually the second thing we look at, after the price. The review follows a set order. First, who is bound: we check that the individuals behind the seller have signed in their own right, that key employees who are not transferring have signed deeds, and that related entities are caught. Second, what it protects: we test the scope of the restraint against the goodwill the buyer is actually acquiring, and push back on definitions of competing business, areas and periods that are wider than the deal requires, because over-reach is what makes clauses void. Third, the mechanics: severability, the NSW read-down, tolling, carve-outs and assignment.
For a seller, we do the same review from the other side. We identify the clauses that will stop the seller working, negotiate carve-outs and narrower definitions, and make sure the restraint matches what the seller was actually paid for. The order of negotiation matters: conduct first, then area, then period, because a clause that is reasonable in scope can survive a longer period, while a wide clause fails however short the period.
Draft the restraint to the goodwill you actually bought
The drafting choice that decides who wins is the calibration of the restraint to the goodwill the buyer actually paid for. Validity is judged at the time the agreement is signed, against every circumstance the clause could cover. The High Court made the point in Geraghty v Minter: if a clause is unreasonable in any of the circumstances in which it could operate, it cannot be supported. A buyer who drafts wide to be safe has drafted a void clause, and a void clause protects nothing. A clause that names the people it binds, protects the specific client relationships and know-how that changed hands, and is no wider than the deal requires, is the clause a court will enforce.
The key points from this article: a restraint of trade is presumed void unless it is reasonable, and the buyer's reasonableness case is the goodwill they paid for. Draft the clause around who is bound, what conduct is prohibited, and how the competing business, period and area are defined. Keep it no wider than the deal requires, build in carve-outs and severability, and remember that in NSW the read-down can save a clause that is reasonable in part, but not one that was never reasonable at all. If the clause matters to your deal, that is exactly the kind of clause worth having a lawyer review before you sign.