Restraint of trade in a business sale and how the clause works

When you buy a business, you are paying for its goodwill: the customers, the reputation, the supplier relationships and the know-how that make it worth more than the sum of its furniture and stock. The moment the sale completes, that goodwill is exposed. The vendor knows the customers personally, knows the margins, and could reopen across the street tomorrow and take most of them back within a year. That risk is why almost every business sale agreement contains a restraint of trade clause, and why the clause is often one of the most negotiated parts of the deal.

A restraint of trade clause is a promise by the vendor not to compete with the business they have just sold, usually for a fixed period and within a fixed geographic area. It can also stop the vendor from poaching customers or staff, or from using confidential information they took with them. This article explains how the clause actually works: who it protects, why the law treats it with suspicion, how a court decides whether it is enforceable, what happens if the vendor breaches it, and where the drafting commonly goes wrong.

Two sides of the same clause

Every restraint clause is a compromise between two people with directly opposed interests, and understanding that tension is the key to seeing how the law treats the clause.

The purchaser wants the value they paid for protected. If the deal assumes the business will keep its customers, the purchaser needs the vendor kept out of the market long enough for the customer connection to transfer to new ownership. The purchaser also wants the vendor's knowledge kept out of competitors' hands.

The vendor wants to keep working. The business being sold is usually the vendor's trade and often their whole career. A clause that stops them from earning a living in their own industry for years, or over a huge area, is a real financial burden on top of whatever they were paid for the business. For many vendors the restraint is the price of the sale, but it should be a priced, negotiated item, not a boilerplate afterthought.

A well-drafted clause usually addresses four things, though not every sale needs all of them:

Non-competition: not carrying on a similar business within a stated radius for a stated period.
Non-solicitation of customers: not approaching or dealing with customers of the business, and often not accepting their approaches either.
Non-solicitation of employees: not poaching the staff who came with the business.
Confidentiality: not using or disclosing the business's customer lists, pricing, supplier terms or trade secrets.

The first is the one most people think of as the "restraint", but in practice the customer and staff non-solicitation promises are often the ones that matter most to a purchaser, and the easiest to justify to a court.

The law starts from a presumption against restraint

Here is the counterintuitive part of the doctrine: a restraint of trade is prima facie void. That is not a quirk of drafting. Since the classic statement of the rule in Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535, the common law has treated restraints of trade as contrary to public policy unless the person seeking to enforce them proves they are reasonable. The public has an interest in people trading freely, and the individual has an interest in earning a living. An agreement that removes both needs to justify itself.

The test has two limbs, both of which the party seeking to enforce the clause must make out:

Reasonableness between the parties: the clause must give the purchaser no more protection than is reasonably necessary to protect their legitimate interest in the business they bought.
Reasonableness in the public interest: the clause must not be injurious to the public, for example by removing a competitor from a market or preventing a skilled person from practising their trade.

The High Court applied the same framework in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288, and it remains the foundation of Australian law in this area, restated in recent decisions such as Belflora Pty Ltd v Vinflora Pty Ltd [2021] NSWCA 178.

Crucially, the law is more lenient with restraints in a sale of business than with restraints in an employment contract. An employer cannot stop an ex-employee from competing merely to reduce competition; that would be restraint for its own sake. But a purchaser has paid real money for the goodwill, and the law recognises that the purchaser is entitled to protect what they bought. In Geraghty v Minter (1979) 142 CLR 177, the High Court treated the benefit of the restraint as effectively part of the goodwill itself, something that "might be expected to increase its worth". The practical effect is that a sale-of-business restraint with a sensible period and area will usually survive scrutiny, while an employment restraint of the same scope often will not.

What the purchaser is actually entitled to protect

The reasonableness inquiry is anchored to a single question: what legitimate interest is the purchaser protecting? The classic formulation, from Herbert Morris Ltd v Saxelby [1916] 1 AC 688, is that the restraint must protect a proprietary interest, not merely shield the purchaser from competition.

For a purchaser of a business, the proprietary interest is the goodwill they acquired: the established customer connection, the business's reputation, its confidential information and trade secrets, and the stability of its workforce. Those are the assets that could walk out the door with the vendor. A clause is easiest to justify when it protects exactly those things.

The corollary is that a restraint is hardest to justify when it protects nothing the purchaser actually bought. A blanket ban that goes beyond the business sold, or that exists simply to keep a competitor out of the market, is vulnerable. The New South Wales Court of Appeal case of Belflora Pty Ltd v Vinflora Pty Ltd [2021] NSWCA 178 is a modern example. Two flower wholesalers split their business between them, and the agreement included a provision preventing one from importing South American flowers at all, effectively giving the other a monopoly over that supply. The Court of Appeal held the provision was an unreasonable restraint of trade and contrary to public policy, even taking into account the read-down power in s 4 of the Restraints of Trade Act 1976 (NSW). The clause was not tied to protecting anything the purchaser had bought; it was a blanket exclusion from a whole category of trade.

The lesson for a purchaser is that the clause must be built around the business actually acquired: the customers that came with it, the area it genuinely served, the information that is genuinely confidential.

How a court tests reasonableness

When a clause is challenged, the court asks whether the clause, at the time the contract was made, gave the purchaser no more than reasonable protection of their legitimate interest. In Geraghty v Minter the High Court posed the question as whether the clause provided, "at the time it was given", no more than reasonable protection of the interest of those in whose favour it was entered into. Timing matters: reasonableness is assessed at the date of the contract, not with the benefit of hindsight at the date of the breach.

In applying that test the court weighs a cluster of factors, none of which is decisive on its own:

Duration: how long the vendor is locked out. For a local business with repeat customers, twelve months to two or three years is commonly defensible; the longer the period, the stronger the justification needed.
Geographic scope: the area the business actually drew customers from. A radius that extends far beyond the business's real catchment is hard to justify.
Scope of activities: what the vendor is stopped from doing. A clause that prevents the vendor from working in a completely different line of work, or in any business at all, will struggle.
The consideration paid: the restraint is part of the price of the business. The more the vendor received for the goodwill, the more protection the purchaser can reasonably claim.
Commercial context: the nature of the business, how customers are won, how much is tied to the vendor's personal relationships, and standard practice in the industry.

Each case turns on its own facts, which is why a clause that was enforced for a hairdressing salon in one suburb will not necessarily survive for a consulting firm with national clients. The court looks at how the clause operates in practice, not just how it reads on the page, which is why overbroad wording is dangerous even if the parties never intended to use it fully.

Cascading clauses and the NSW read-down

Because a court will not rewrite an unreasonable clause, careful drafters build fallbacks into the clause itself. The most common technique is a cascading or "laddered" clause: instead of one restraint, the clause sets out progressively narrower alternatives, for example three years and a 20 kilometre radius, failing which two years and 10 kilometres, failing which one year and 5 kilometres. Each rung is drafted as a separate, severable promise.

The idea is simple. If the top rung is too broad and the court strikes it down, the next rung down may still be reasonable and enforceable. In New South Wales the Restraints of Trade Act 1976 (NSW) takes this further. Section 4(1) provides that a restraint of trade is valid "to the extent to which it is not against public policy, whether it is in severable terms or not". That is a statutory read-down power: even a single, non-severable clause that is too broad can be enforced to the extent that it is reasonable, rather than being struck down in its entirety. The section also lets a court, on application by the person subject to the restraint, declare the restraint invalid or cut it down where the person who created it made no real attempt to make it reasonable.

Outside New South Wales the position is more conservative. At common law a court can sever and strike out the offending part of a clause under the "blue pencil" test, but only if the remaining part still makes sense as a standalone promise and the deletion does not change the character of the whole clause. If the clause is drafted as a single indivisible promise that is too broad, the whole clause may be void. That difference matters for a national business: a clause that would be read down in Sydney may be struck out entirely in Melbourne or Brisbane. Getting the drafting right at the start is the only reliable protection, because the fallback position varies by state.

What happens if the vendor breaches

If the vendor opens a competing business, or solicits customers or staff, in breach of the clause, the purchaser's remedies are the usual contractual ones, adapted to the urgency of the situation.

The most important remedy in practice is the injunction. A purchaser does not want damages after the fact; they want the vendor stopped before the customer base is destroyed. Courts regularly grant interlocutory (interim) injunctions to hold the position while the dispute is resolved, and final injunctions at trial. The Federal Court decision in AEI Insurance Group Pty Ltd v Martin [2023] FCA 914 shows both sides of that coin: an insurer obtained an interlocutory injunction enforcing a twelve-month non-solicitation restraint against a former broker, but the injunction was later discharged when the court was persuaded the circumstances had changed and the balance had shifted. Injunctions in this area are urgent, heavily fact-dependent and require prompt action.

The other remedy is damages. The court will award compensation for the loss the purchaser actually suffered as a result of the breach, which in practice usually means lost profits from customers who followed the vendor. Proving that loss is often the difficult part: the purchaser has to show that particular customers would have stayed but for the vendor's conduct. In some cases an account of profits, requiring the vendor to hand over the profits they made from the breach, may also be available. The choice of remedy, and the amount, turns on the facts of the particular case.

There is also a practical dimension. A vendor who breaches a restraint should expect the purchaser to move quickly and seek an urgent injunction, and should not assume the clause is unenforceable just because it is aggressive. The clause binds until a court says otherwise, and the costs of fighting an injunction application can be substantial.

Where the drafting commonly goes wrong

Most restraint disputes are born at the drafting table, not at the breach. The recurring problems are:

Template clauses: A restraint copied from another deal without regard to the actual business: a national radius on a local business, or a three-year period for a business where customers turn over in months.
Protection of nothing: Clauses drafted to stop competition rather than to protect the goodwill actually bought, which is exactly the failure in Belflora.
Single indivisible restraint: One all-or-nothing promise with no cascading fallback and no severability, which risks the whole clause if the court finds it too broad.
Ignoring completion: Restraints that are not clearly tied to completion of the sale, so that the position is ambiguous if the deal falls over or is delayed.
Wrong people bound: The vendor's new company, family members or business partners may not be caught unless the clause expressly covers them, leaving an easy path around the restraint.
Slow enforcement: Waiting months after discovering a breach before applying for an injunction can undermine the urgency the purchaser needs to rely on.

For a vendor, the equivalent mistakes are accepting a clause without testing what it means for their ability to earn a living, and not negotiating the scope down in exchange for other terms. A restraint that leaves the vendor unable to work in their own trade for years is a genuine cost of the deal, and it should be treated as one.

Where a lawyer fits in

The value of legal advice in this area is concentrated at two points: when the contract is being negotiated, and the moment a breach is discovered.

At the drafting and negotiation stage, a commercial lawyer's job is to fit the clause to the business being sold. That means working out the real customer catchment to set the radius, the real risk period to set the duration, deciding which activities need to be caught, structuring the clause as a cascade with severable rungs, and making sure the right people and entities are bound. For a purchaser, that advice protects the asset they are paying for. For a vendor, it prevents them from signing away their livelihood. A lawyer can also advise on how the clause will be treated in the relevant state, including whether the NSW read-down applies and what the position is in other states.

At the breach stage, time is everything. An injunction application can be on foot within days of the breach being discovered, and the purchaser's prospects depend on acting promptly and marshalling evidence of the actual harm. A lawyer who knows the restraint-of-trade case law can assess whether the clause is likely to hold up, what evidence is needed, and whether an urgent injunction or damages is the right strategy. For a vendor facing an injunction, the same advice works in reverse: whether the clause is enforceable, whether the purchaser's evidence is adequate, and what a negotiated exit might look like.

Signing day decides enforceability

The single most important fact about a restraint of trade clause is that the court will not fix it for you. If the clause is unreasonable, the court's options are to cut it down (in New South Wales), to sever part of it, or to strike it out entirely, and none of those outcomes is predictable at signing. What the parties control is the clause itself: whether it is built around the goodwill actually sold, whether it cascades down to a defensible core, and whether the vendor is fairly compensated for giving up their ability to compete. A purchaser who pays for a thorough, well-fitted clause is buying enforceable protection, and a vendor who negotiates the scope down is protecting their next career move. Both are cheaper to secure at the drafting table than in court afterwards, and a conversation with a commercial lawyer before the contract is signed is the most cost-effective way to get there.