This extract from a recent Federal Court decision is an excellent summary of the legal principles which apply to the validity and enforceability of restraints of trade in Australian employment contexts.
“Restraint of trade principles
“15 The fundamental statement of principle in relation to restraints of trade was stated by Lord Macnaghten in Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Company Limited [1894] AC 535 at 565:
The public have an interest in every person’s carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable – reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public. That, I think, is the fair result of all the authorities.
16 The above passage was cited by the New South Wales Court of Appeal in Isaac v Dargan Financial Pty Ltd [2018] NSWCA 163; 98 NSWLR 343 in its restatement of the fundamental principle at [59] (Gleeson JA, with whom Bathurst CJ and Beazley P agreed), which benefits from the context of the complete quote from Nordenfelt above:
At common law a restraint of trade is contrary to public policy and void unless justified by the special circumstances of the particular case. A restraint may be enforced if the restraint is reasonably necessary for the protection of the parties concerned and reasonable in the interests of the public: Nordenfelt v The Maxim Nordenfelt Guns and Ammunition Company Ltd [1894] AC 535 at 565 (Lord Macnaghten); Lindner v Murdock’s Garage (1950) 83 CLR 628 at 633 (Latham CJ); [1950] HCA 48; Buckley v Tutty (1971) 125 CLR 353 at 376, 379–380; [1971] HCA 71.
17 The validity of a restraint is necessarily dependent upon the context in which it exists, including the form of agreement in which it is found, and the nature of the work being performed by the person bound by it. This point was captured by Latham CJ in Lindner v Murdock’s Garage [1950] HCA 48; 83 CLR 628 at 633-634:
It is well established that prima facie all restraints upon trade are invalid, but that they may be upheld if the party seeking to enforce them shows that circumstances exist which make the restraint reasonably necessary for protection of a covenantee’s business and that it is not contrary to public interests. A distinction is drawn between a restraint upon trade included in an agreement for the sale of a business and a restraint included in an agreement with an employee. The restraint is more easily upheld in the former than in the latter case.
…
Where an employee has access to trade secrets or other confidential information he may be restrained by agreement from communicating those secrets or such information to other persons, and particularly to competitors in trade with his employer. Again, an employee who is brought into personal contact with the customers of his employer may by agreement effectively bind himself to abstain after his term of service has been completed from soliciting the customers of his former employer. In these cases the covenant in restraint of trade is not a covenant against mere competition but is a covenant directed to securing a reasonable protection of the business interest of the employer, and in the circumstances is not unjust to the employee. The interest which can validly be protected is the trade connection, the goodwill of the business of the employer.
18 The reasonableness of the restraint is judged at the time it is made, although a court may take into account future events that could have been foreseen: Lindner at 653 (Kitto J).
19 Whether a restraint is reasonable as between the parties depends on two related considerations. First, the identification of a legitimate protectable interest, and second, whether the restraint is no more than reasonable for the legitimate protection of that interest: Belflora Pty Ltd v Vinflora Pty Ltd [2021] NSWCA 178; 106 NSWLR 67 at [46] (Brereton JA). As to the identification of a legitimate protectable interest, Brereton JA said at [46] (footnotes omitted):
The identification of a legitimate protectable interest is fundamental; without one, no restraint is reasonable; and where one is established, it informs the extent of what is reasonable to protect it. The legitimate interests which may be the subject of protection by covenant are in the nature of proprietary subject matter, including trade secrets and confidential information, and goodwill including customer connection. It extends to information as to the identity of reliable suppliers, even though not such as to amount to a “trade secret” which would attract equitable protection in the absence of express agreement; and to connection with staff, so that “anti-poaching” covenants prohibiting a former employee from soliciting the employer’s staff have been upheld. However, it is well-established that a covenantee is not entitled to protection against mere competition.
20 The word “proprietary” in this context is used in a special sense and includes legitimate commercial interests: Dargan at [65] (Gleeson JA); Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607 at 612 (Young J). When considering “goodwill”, it is more accurate to refer to it as having sources rather than comprising of elements, despite the fact that many of the sources of goodwill are not themselves property: Dargan at [66] (Gleeson JA); Commissioner of Taxation of the Commonwealth of Australia v Murry [1998] HCA 42; 193 CLR 605 at [24]-[25] (Gaudron, McHugh, Gummow and Hayne JJ). In that sense, a source of goodwill can be an agreed absence from competition: Murry at [16].
21 An employer’s customer connection is an interest which can support a reasonable restraint of trade in certain circumstances. As Brereton J stated in Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; 71 NSWLR 9 at [25]:
It is plain that an employer’s customer connection is an interest which can support a reasonable restraint of trade: Hitchcock v Coker (1837) 6 Ad& El 438[1835–42] All ER Rep 452 (Tindal CJ); Herbert Morris Ltd v Saxelby (at 709); Dewes v Fitch [1920] 2 Ch 159 at 181; Coote v Sproule (1929) 29 SR (NSW) 57846 WN (NSW) 180 (Harvey CJ in Eq); Lindner v Murdock’s Garage (at 633–634) (Latham CJ, Webb J agreeing), (at 650) (Fullagar J), (at 654) (Kitto J); and Koops Martin Financial Services Pty Ltd v Reeves (at [29]–[33]). Such a restraint is legitimate if the employee has become, vis-à-vis the client, the human face of the business, namely the person who represents the business to the customer — or, as it was put by Hoover J in Arthur Murray Dance Studios of Cleveland Inc v Witter (1952) 105 NE(2d) 685 at 706 (Ohio): The personal relation between the employee and the customer [is] such as to enable the employee to control the customer’s business. (And see Twenty-First Australia Inc v Shade (Young J, 31 July 1998, unreported) at 12; Koops Martin Financial Services Pty Ltd v Reeves (at [34]).) While the employer is not entitled to be protected against mere competition by a former employee, the employer is entitled to be protected against unfair competition based on the use by the employee after termination of employment of the customer connection which the employee has built up during the employment — which, because the employee has in effect represented the employer from the customer’s perspective during the employment, might at least temporarily appear attached to the employee, but in truth belongs to the employer: Koops Martin Financial Services Pty Ltd v Reeves (at [30]).
(Emphasis added.)
22 An employer’s legitimate protectable interests do not extend to an employee’s personal attributes and skills, which remain the property of the employee. As the Privy Council explained in Stenhouse Australia Ltd v Philips [1974] AC 391 at 400:
The accepted proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man’s improving ability and talents which lies at the root of the policy of the law regarding this type of restraint. Leaving aside the case of misuse of trade secrets or confidential information (which is separately dealt with by clause 3 of the agreement and which does not arise here), the employer’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation. For while it may be true that an employee is entitled — and is to be encouraged — to build up his own qualities of skill and experience, it is equally his duty to develop and improve his employer’s business for the benefit of his employer. These two obligations interlock during his employment: after its termination they diverge and mark the boundary between what the employee may take with him and what he may legitimately be asked to leave behind to his employers.
23 As part of his case, Mr Moroney submits that the restraints are invalid because they seek to restrict the application of his own skills and attributes, which could not be properly regarded as the property of his employer and thus could not be a legitimate protectable interest.
24 Once a legitimate protectable interest has been identified, a restraint clause will be valid as between the parties if it does no more than is reasonably necessary to protect that legitimate interest in its duration or extent. Expressed another way, it “must afford no more than adequate protection to the party in whose favour it is imposed”: Amoco Australia Pty Limited v Rocca Bros Motor Engineering Co Pty Limited [1973] HCA 40; 133 CLR 288 at 315 (Gibbs J).
25 Reasoning by analogy to vendor/purchaser contracts, Mr Moroney submits that the key question for assessing the period that is reasonable to protect goodwill is not the period it may take to recover the full investment made, but how long it takes to protect the goodwill from being subtracted from by the vendor or former employee: DXC Eclipse v Wildsmith [2023] NSWCA 98; 324 IR 89 at 121 [157] (Bell CJ, Brereton JA and Simpson AJA agreeing). Mr Moroney did not appear to suggest that this provided a fixed rule for assessing the duration of a restraint. What is reasonable will necessarily depend on the particular circumstances of a case: Just Group Ltd v Peck [2016] VSCA 334; 344 ALR 162 at [32] (Beach and Ferguson JJA and Riordan AJA).
26 A restraint of trade clause should be construed using ordinary rules of construction to ascertain its meaning. A restrictive approach to general words should not be adopted simply to save a covenant from invalidity: Butt v Long [1953] HCA 76; 88 CLR 476 at 487 (Dixon CJ). As well, although the restraints contained in the shareholders agreement and the employment agreement are similar in substance, they should be viewed through different lenses, as a stricter and less favourable view is taken of restraints in employment contexts in comparison to restraints in commercial contexts: Dargan at [67], citing and quoting from Woolworths Ltd v Olson [2004] NSWCA 372 at [38] (Mason P, with whom McColl and Bryson JJA agreed).
27 That said, some caution is needed in applying that distinction too mechanically. The operation of the shareholders agreement expressly covers areas that would ordinarily be expected to be found in an employment agreement and was evidently targeting the activities of shareholders in their capacity as employees. This, to some extent, blurs the distinction between employment contracts and non-employment contracts.
28 At common law, the onus is on the respondents, as the parties seeking to rely upon the restraints, to demonstrate that there was a legitimate protectable interest and that the restraints were reasonable to protect those interests. However, the onus shifts to Mr Moroney if he seeks to establish invalidity on the basis that the restraints are contrary to public policy: Peck at [36] (Beach and Ferguson JJA and Riordan AJA); Liberty Financial Pty Ltd v Jugovic [2021] FCA 607 at [194] (Beach J)…………………………………….
Moroney v TM Insight Operations Pty Ltd [2025] FCA 1337 per BROMWICH J delivered 7 Nov 2025