Can your Business Effectively Protect Its Interests?

Can your Business Effectively Protect Its Interests?

Restraint of Trade Clauses can also be applied between businesses. This is often the case when one business is split into two businesses, or in Joint Venture Agreements where two businesses agree to co-operate on a project. A recent NSW Supreme Court Case involving flower wholesalers has shown how Restraint of Trade Clauses will not always be enforced by Courts.

The dispute began with two men who went into business together in equal shares in a company that sold wholesale flowers at the Sydney Flower Market. Both men had specialized in importing flowers from particular parts of the world. One imported flowers from South America (“The South American Importer”), while the other imported flowers from Kenya (“The Kenyan Importer”). The business saw over 10 years of growth and success until one day there was a personal dispute between the two men. They agreed to divide the business into two separate companies. As part of the agreement to split the company, a Restraint of Trade Clause was included which would mean that one company could only sell South American Flowers, while the other could only sell Kenyan flowers. The men agreed this was important because they did not want to have identical stands at the markets. There were no exceptions to this clause and there was no time limit on the restraint.

One day the Kenyan Importer found a new supplier that provided flowers that were imported from South America. He began displaying the flowers and shortly after, the South American Importer sued him under the Restraint of Trade Clause, wanting a Court order to stop the sale of the South American flowers.

At Court, the South American Importer argued that the agreement was important as both parties had an interest in protecting each other from competition against the other.

The Court found that using a Restraint of Trade Clause requires a “legitimate interest” to be protected. In this case, the only interest that the Court could identify was that the South American importer did not want direct competition. This was found to not be a “legitimate interest” and found that the Restraint of Trade Clause was unreasonable.

The Court refused to enforce the Restraint of Trade Clause, and the Kenyan Importer was able to continue selling South American flowers.

This case demonstrates that Restraint of Trade Clauses must be considered and drafted carefully. Courts will only be prepared to enforce Restraint of Trade Clauses that protect legitimate interests such as confidential information including production processes, and service techniques, or customer connections