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Restraint of trade – what is reasonable?

Many employment agreements contain restraints of trade clauses but there is considerable uncertainty about whether or not they have any effect.

A well drafted and reasonable restraint of trade clause for which consideration has been given is enforceable and necessary to prevent an employee taking unfair advantage when they leave.

However, the Courts are less likely to enforce a restraint of trade if there is another means of protecting the employer’s interests. For example, if there is a comprehensive confidentiality clause which is adequate to protect the interests at risk, then the Court may consider that the restraint is unnecessary. That does not mean that confidentiality clauses should be ignored. Confidentiality clauses are an important part of an employment agreement and are more easily and readily enforced than a restraint.

A court won’t enforce a restraint of trade that effectively prevents an employee from being able to earn a living.

Some restraints have been unenforceable because of the inequality of bargaining position which existed at the time the restraint was entered into. For example, if an employee is placed under pressure to sign an agreement on the spot or does not have access to legal advice at the time the terms are agreed, that can result in the restraint being unreasonable.

A restraint of trade will be reasonable if it affords adequate, but not more than adequate, protection for the employer’s rights.

A restraint of trade will not protect an employer from mere competition from a former employee.

The employer’s claim for protection must be based on some interest or property of the employer and an identifiable advantage which the employee could obtain by using that.

An employer cannot seek to prohibit a former employee from using the additional skills and experience gained in the ordinary course of employment. The proprietary interests that the employer wants to protect must be something more than that. Often, a restraint is upheld where an employee, through their employment position, establishes close relationships with the employer’s clients or customers and can influence them, or entice them away. Clauses restraining junior employees or employees who do not have access to confidential or commercially sensitive information are unlikely to warrant protection.

A valid restraint must be limited in terms of geographical area and time.

The more extensive the restraint, the more difficult it is to establish that it is reasonable.

It is more common for restraints to be upheld for periods not exceeding six months. In some cases the Courts will reduce the scope of the restraint rather than strike it out entirely but the Court has a discretion as to whether or not it will do that.

What is clear that the Employment Courts will enforce restraints if they are reasonable and the courts have been doing so with increasing regularity in recent years.

Article is supplied by East Brewster Ltd in Rotorua – Commercial and Property Law Specialists