HOW FAR IS TOO FAR: THE SCOPE AND ENFORCEABILITY OF RESTRAINTS OF TRADE IN NEW SOUTH WALES

Last Updated on 29/10/2026 by Damin Murdock and Janice Ng

A restraint of trade can protect the value of a business, but it can also restrict a person’s livelihood long after a working relationship has ended. The difficulty lies in identifying where legitimate protection ends and an unjustified restriction on competition begins. In New South Wales, that boundary depends on the wording of the agreement, the interest requiring protection and the evidence supporting the restraint’s practical reach.

Non-compete clauses restrict participation in competing businesses. Customer restraints may prohibit solicitation, dealing or accepting approaches, while employee restraints may restrict recruitment or inducement to leave. Confidentiality provisions address the use or disclosure of information. These protections differ in their effect, and the justification for one does not necessarily establish the necessity of another.

The cases do not prescribe a standard restraint period or a universal combination of geographical and activity limits. They require an agreement sufficiently certain to be construed and a restriction no wider than reasonably necessary to protect a legitimate interest. A carefully drafted clause is therefore only the beginning: its enforceability depends on the commercial circumstances that justify it.

Protectable interests and the limits of protection against competition

The distinction between protecting a business interest and suppressing competition is fundamental. In Lindner v Murdock’s Garage (1950) 83 CLR 628, Latham CJ identified confidential information and customer relationships as interests capable of protection. His Honour described the latter as “the trade connection, the goodwill of the business of the employer” [634]. Fullagar J accepted that a legitimate interest might justify restricting the carrying on of a trade or occupation, but only within limits “which will be jealously scanned to see that the restraint goes no further than is reasonably necessary” [650] (emphasis added).

The modern formulation appears in Tullett Prebon (Australia) Pty Ltd v Simon Purcell [2008] NSWSC 852. Brereton J identified two related questions: whether the beneficiary has a legitimate protectable interest and whether the restraint is no more than reasonable for its protection. His Honour clearly stated that “a covenantee is not entitled to be protected against mere competition” [47].

An employer must therefore connect the prohibited conduct to an identifiable risk to confidential information, goodwill or another recognised interest. The prospect that a former employee will become an effective competitor does not, by itself, supply that connection.

The same discipline applies to commercial bargains. In Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973) 133 CLR 288, Gibbs J explained that equal bargaining power does not leave reasonableness entirely to the parties. Contractual freedom must be considered alongside the policy against unreasonable restrictions on trade (Amoco [316]-[318]). An acknowledgement that a restraint is reasonable may carry weight, but cannot settle the legal question.

The party seeking enforcement bears the burden of establishing the circumstances supporting the restraint’s necessity. Where reasonableness between the parties has been established, the burden of showing a separate injury to the public interest falls on the party alleging it: Amoco [316]-[318].

Construction and the need to establish a breach

Before assessing reasonableness, the court must identify what the clause prohibits and whether the actual or threatened conduct falls within it. A business operating in the same broad industry is not necessarily a competitor for the purposes of the agreement.

In Allied Express Transport Pty Ltd v Braim [2022] NSWSC 1298, the distinction between truck delivery services and van delivery services was material. The court examined the services actually supplied, their scale and the contractual exception applicable to the customer concerned. Allied failed to prove a breach or apprehended breach, so there was no occasion to determine the restraint’s validity under s 4 of the Restraints of Trade Act 1976 (NSW) (Allied Express, [278]-[291])

The court’s additional observations about overbreadth were expressly conditional. They nevertheless illustrate the difficulty of restraining an onsite supervisor in respect of all customers, employees and contractors, irrespective of his dealings with them. The employee’s actual responsibilities and anticipated access to information did not support the breadth of the protection sought (Allied Express, [292]-[295]).

Construction can thus resolve a dispute before public policy becomes decisive. Employers and employees should examine the clause’s definitions, exceptions and business context before assuming that a move to another organisation constitutes a breach.

Confidential information and the justification for a non-compete restraint

Confidential information may support a restraint even where customer connection does not. The relevant inquiry concerns the nature of the information, the employee’s anticipated access to it and the potential disadvantage if it becomes available to a competitor.

In Portal Software v Bodsworth [2005] NSWSC 1179, the court rejected customer connection as a justification: the employee was not the relevant account executive and no special customer relationship had been identified. However, his access to substantial confidential information, and the possibility of its conscious or unconscious use for a competitor, supported the restraints as properly construed (Portal Software, [80]-[83], [87]-[89]). The absence of proven disclosure was not decisive. The court recognised the practical difficulty of enforcing a confidentiality obligation where commercially useful information can be retained in an employee’s memory. In those circumstances, a non-compete restraint could provide protection beyond a prohibition on disclosure (Portal Software, [82]-[83]).

That reasoning does not justify every restriction imposed on an employee who encounters confidential material. In McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201, the Court of Appeal stated: “it is not necessary to identify with precision the confidential information that justifies a competitor restraint” [142]. There must still be evidence supporting the legitimate interest and the extent of protection claimed. The distinction is particularly important when duration is disputed: establishing that information deserves protection does not establish how long a former employee should be prevented from competing.

Customer connections and the difference between solicitation and dealing

Customer connection can justify protecting relationships developed through employment, including relationships established by an employee working as part of a team. The employee need not control whether the customer stays or leaves. The possibility that personal knowledge and influence may undermine the employer’s goodwill can be sufficient as seen in the case of Janala Pty Limited v Hardaker (No 3) [2023] NSWSC 446, [52]-[53].

Protection may also extend to genuine prospective customers. In Ross v IceTV [2010] NSWCA 272, senior executives had participated in high-level negotiations and possessed relevant pricing and technological knowledge. The Court of Appeal upheld protection for connections with potential customers with whom substantive discussions or negotiations had occurred. A concluded sale was not essential to the existence of a protectable interest (Ross, [115]-[124]).

The precise conduct prohibited remains important. A non-solicitation clause and a non-dealing clause need not have the same operation. In Dargan Financial Pty Ltd v Nassif Isaac [2017] NSWSC 1077, the contractual provisions captured both approaching clients and accepting their approaches. The court held that it made no difference, under the clauses as construed, which party initiated contact. The defendant’s substantial involvement with clients before, during and after loan approval supported the protection of the plaintiff’s goodwill (Dargan Financial, [254]-[257]).

A former employee or contractor should therefore not assume that a client’s unsolicited approach avoids a restraint. Equally, the employer must justify the particular restriction it seeks to enforce; a wider prohibition on dealing cannot simply be treated as synonymous with a narrower prohibition on solicitation.

Non-compete restraints and the adequacy of narrower protections

A non-compete clause may exclude a person from employment that would otherwise be lawful, making its necessity especially significant. Where narrower restrictions adequately protect the relevant interest, a broader restriction requires further justification. Richmond J expressed the point in Janala, stating “if, on the facts of the case, the non-solicitation restraint provides adequate protection, the non-compete restraint will not be necessary to protect the customer connection.” [54].

The court also recognised that difficulties in detecting and enforcing solicitation restrictions may leave them insufficient. The inquiry is practical, whether narrower protection actually addresses the commercial risk, rather than whether a narrower clause exists on paper.

The contrasting outcomes in Portal Software and KPW Law Pty Ltd v Patel [2023] NSWSC 617 demonstrate that distinction. In KPW Law, the employer relied on goodwill to restrain a former criminal lawyer from establishing a practice within a geographical area for two years. Richmond J identified substantial questions about whether the restraint exceeded what was required to protect existing client relationships. The undertaking offered by the former employee provided reasonable protection for the goodwill relied upon, and interlocutory relief preventing the competing practice was refused (KPW Law, [35]-[41], [49]-[51]). That was an interlocutory decision, not a final determination that the clause was wholly invalid. Its significance lies in the court’s assessment of the protection needed pending trial and the weakness of the case for a broader injunction.

Duration and the evidence needed to justify it

There is no standard period that makes a restraint reasonable. Its duration must correspond to the interest being protected, including the time required to rebuild customer relationships or the period during which confidential information remains commercially useful.

In Janala, a six-month non-compete restraint was upheld. The employee’s operational role involved direct customer contact, knowledge of confidential pricing and contractual arrangements, and relationships with personnel responsible for choosing specialist freight suppliers. Six months allowed the employer to introduce a replacement and establish that person’s effectiveness (Janala, [60]-[63]).

The employer did not, however, establish the necessity of the twelve-month period contained in a later undertaking. Assertions about replacement and training did not explain why twelve months, rather than six, was required. The court also considered the nature of the pricing information, its diminishing practical value and the continuing confidentiality obligation. The extended restraints were confined to six months (Janala, [112]-[119]).

In McMurchy, the Court of Appeal rejected a nine-month post-employment restraint against Mr Kumaran. His relatively junior position, limited duties and the short-lived nature of the information he could be expected to obtain were material. Employsure had not adequately demonstrated the commercial currency required to justify nine months. No alternative shorter period was advanced on appeal, and the court did not determine one (McMurchy, [140]-[152]).

By contrast, a twelve-month restriction was upheld on the particular facts in Ross, involving senior executives with substantial knowledge and involvement in important negotiations (Ross, [117]-[124]). These outcomes show why neither seniority nor a selected number of months can substitute for evidence connecting the period to the risk.

Geography and the practical reach of the restraint

Geography is one way of limiting a restraint, but it is not a universal formal requirement. A restriction directed to an ascertainable customer connection may be confined through the persons and activities covered rather than a territorial boundary. The question remains whether its practical reach is justified.

Conversely, a stated geographical area does not establish reasonableness. In KPW Law, Richmond J questioned whether an area restraint extending to a population of over 100,000, only a small fraction of whom would be existing clients, went beyond the protection of the goodwill relied upon (KPW Law, [38]).

Activity limits require the same attention. Restrictions covering employment or involvement “in any capacity” should be examined for their effect on roles that may pose little or no risk to the protected interest. The business field, the relevant customer class and any exceptions can materially affect whether a restraint leaves meaningful opportunities to work.

Certainty and the limits of section 4 of the Restraints of Trade Act

New South Wales legislation allows flexibility in enforcing an overbroad restraint. Section 4(1) provides: “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.”

The statutory approach focuses on whether the actual or threatened conduct infringes the clause as properly construed and whether the restraint, in its application to that conduct, is contrary to public policy. It does not require every hypothetical application to be valid before a reasonable application can be enforced (Janala, [43]; Ross, [89]-[91]).

That flexibility must not be confused with a power to create an agreement. In the matter of Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789, the relevant clause referred to undefined restraint time and restraint distance. Black J explained, “the Court would not be interpreting an agreement the parties had formed, albeit obscurely expressed, but establishing an agreement to apply over a period and one that the parties had not in fact agreed” [252].

Section 4(2) preserves invalidity arising for reasons other than restraint of trade public policy, including contractual uncertainty. It could not supply the missing consensus. A separate clause operating while the parties remained shareholders did not suffer the same uncertainty and was considered independently (Colorado Products, [251]-[253], [258]-[259]).

An intelligible restraint may consequently be enforceable within a reasonable part of its expressed operation. A clause whose essential operation cannot be ascertained presents a different problem. Cascading alternatives may assist in identifying available periods or areas, but do not establish that any particular alternative is necessary, nor excuse defective drafting.

Employment restraints and purchased goodwill in a genuine business sale

Employment restraints receive stricter scrutiny than restraints protecting goodwill acquired through a genuine business sale as the purchaser in a business sale is deemed to have paid for an asset whose value may be undermined if the vendor immediately takes back the customer connection. An employee ordinarily has not sold that asset (Lindner, 633-634; Ross, [88]).

The distinction does not dispense with certainty or proportionality. Colorado Products demonstrates both points. Purchased goodwill supported the reasonableness of the ascertainable shareholder restraint, but the undefined restraint remained void for uncertainty. Moreover, the effective restraint was not breached because the supplier business concerned was not the same or a similar business within the clause’s proper meaning (Colorado Products, [251]-[259]).

The substance of the transaction matters. A court must identify the interest actually acquired and the conduct that threatens it, rather than assume that a commercial agreement automatically warrants broader protection.

Public interest and proposed reform

The practical effect of a restraint is particularly significant where an employee’s skills and experience are concentrated in a specialised industry. In Buckley v Tutty (1971) 125 CLR 353 at [22], the High Court explained that unreasonable restraints are unenforceable because, “it is contrary to the public welfare that a man should unreasonably be prevented from earning his living in whatever lawful way he chooses and that the public should unreasonably be deprived of the services of a man prepared to engage in employment.”

A restraint preventing a specialist in telecommunications automation and cloud-based services from working for any business offering the same or similar services may substantially restrict that person’s ability to earn a livelihood. That practical consequence is relevant to assessing whether the restraint extends beyond what is reasonably necessary to protect the employer’s legitimate interests.

The government has announced proposed reforms directed principally at employment restraints. The Treasury states the reforms announces in 2025-2026 Budget include a proposed ban on non-compete clauses for low- and middle-income workers, as well as wage-fixing and no-poach agreements. Treasury indicates that the reforms are intended to take effect from 2027, following consultation and the passage of legislation.

Treasury identifies the stated policy concern as a “chilling effect” as workers may refrain from changing employment because they are uncertain whether a restraint is enforceable, even where it may be unreasonable. Treasury links job mobility with wages, skill development, new business entry and economic dynamism. The September 2026 consultation announcement also indicates that the government is consulting on potential bans on co-worker non-solicitation clauses and cascading restraint clauses, together with exemptions and safeguards for legitimate business interests.

Note, however, that these proposals are not presently a substitute for the existing NSW statutory and common-law framework. Their final form, commencement provisions and operation alongside State restraint legislation should be checked before reliance in advice or drafting.

Drafting and assessing restraints in practice

The strongest restraint is one whose limits can be explained by reference to the interest it protects. The drafting should identify the prohibited conduct, make its operation ascertainable and confine its reach to the relevant role, relationships and commercial risk. The evidence should explain why the period is needed and why narrower protection would be insufficient.

For employers, a broad clause and an employee’s signature do not remove the need for that justification. For employees, the absence of solicitation, the junior nature of a role or a promise to preserve confidentiality does not necessarily resolve the question. Each must be assessed against the wording and the interest relied upon.

The governing principle is precise: a restraint may preserve a legitimate business interest, but its enforceability extends only as far as the law and evidence justify. In New South Wales, statutory flexibility assists the enforcement of reasonable protection within an intelligible agreement. However, it does not supply missing consensus or turn protection against ordinary competition into a legitimate contractual entitlement.

At Leo Lawyers, we regularly draft, defend against, and enforce restrictive covenants, whether they relate to intellectual property, confidentiality, non-solicitation or restraint of trade provisions.

If you are looking to enforce or defend proceedings relating to these matters, feel free to contact Damin Murdock at Leo Lawyers via our website, on (02) 8201 0051 or at office@leolawyers.com.au. Further, if you liked this article, please subscribe to our newsletter via our Website, and subscribe to our YouTube, LinkedIn, Facebook and Instagram. If you liked this article or video, please also give us a favourable Google review.

DISCLAIMER: This is not legal advice and is general information only. You should not rely upon the information contained in this article. If you require specific legal advice, please contact us.