Restraints of Trade Act 1976

The Act affects any person or entity that seeks to impose, or is subject to, a post-employment, post-sale or associational restraint operating in New South Wales after 1976.

Employers and vendors of businesses are the primary beneficiaries. They can draft restraints of trade confident that an overly broad clause will not automatically fail in its entirety. Employees, former employees, purchasers of businesses, and members of associations or corporations are the primary persons protected by the public-policy limit and the s 4(3) discretion. Because "association" expressly includes a corporation (s 2(1)), directors, shareholders and members of companies are within the Act's reach when restraints appear in constitutions or shareholder agreements.

The Supreme Court is the only forum empowered to make the discretionary order under s 4(3). Consequently, litigants must bring proceedings in that Court if they wish to invoke the statutory adjustment mechanism. Lower courts and tribunals retain jurisdiction to determine the validity of restraints under s 4(1) but cannot make the specific orders contemplated by s 4(3).

Because the Act operates "notwithstanding any stipulation to the contrary" (s 3(2)), choice-of-law clauses purporting to apply another jurisdiction's law cannot exclude the operation of the statute where the restraint affects New South Wales. The temporal cut-off in s 3(1) means that anyone still affected by a pre-1976 restraint falls outside the Act and remains subject to the unmodified common law.

The Act itself creates few positive duties. Its principal contribution is to re-state the rights of the parties and the powers of the Supreme Court.

A person seeking to enforce a restraint may rely on the right created by s 4(1): the restraint is valid to the extent it is not against public policy. That person therefore has a statutory right to seek injunctive relief or damages for breach of the enforceable portion of the restraint.

A person subject to a restraint has the right to apply to the Supreme Court under s 4(3) where two cumulative conditions are satisfied: (a) the restraint is against public policy as regards that applicant, and (b) that outcome arises at least partly from a "manifest failure" by the creator of the restraint to attempt to make it reasonable. The applicant is entitled to an order calibrated to the circumstances in which the restraint was created. The Court may impose terms it thinks fit.

An association whose rules contain a restraint is deemed, for the purposes of the s 4(3) application, to have created the restraint (s 4(4)). Members therefore gain the same procedural right against the association as they would against an individual covenantor.

Neither the creator nor the subject of a restraint is placed under any new statutory duty of good faith or reasonableness at the drafting stage; the "manifest failure" concept operates only as a jurisdictional gateway to the Court's discretion. Rights to damages or other remedies accrued before any s 4(3) order remain intact (s 4(5)).

The Act creates no criminal offences and imposes no monetary penalties. Enforcement is entirely civil. A party wishing to uphold a restraint may commence proceedings in the Supreme Court (or, where the amount is within jurisdictional limits, in the District Court) seeking a declaration of partial validity under s 4(1), an injunction, or damages.

Where the applicant under s 4(3) succeeds, the Court may order the restraint to be invalid or valid only to a stated extent. Because the order cannot operate retrospectively (s 4(5)), any breaches that occurred before the order are still actionable. The Act does not prescribe a limitation period; the ordinary six-year contractual limitation period applies.

Costs ordinarily follow the event. The existence of the statutory discretion may influence costs orders where a party has insisted on the full breadth of an obviously excessive restraint.

Section 3(3) expressly preserves the operation of listed statutes. Section 304 of the Industrial Relations Act 1996 continues to govern restraints contained in industrial instruments. Section 125 of the Co-operatives National Law (NSW) is similarly unaffected. Any other State or Commonwealth enactment that deals with the validity of restraints is left intact.

The note to s 3 reminds readers that the Competition Code of New South Wales (which applies the Competition and Consumer Act 2010 (Cth) as a law of New South Wales) and the federal Act itself contain provisions on restraints of trade. Section 45 of the Competition and Consumer Act 2010 (Cth) prohibits contracts that substantially lessen competition; a restraint that survives the Restraints of Trade Act 1976 may nevertheless contravene that provision. The two statutes therefore operate cumulatively: a restraint may be reasonable as between the parties yet still offend competition policy.

The Act does not disturb equitable doctrines such as breach of confidence or fiduciary duty that may overlap with a contractual restraint. Nor does it affect the law relating to severance at common law; s 4(1) provides an additional, statutory route to partial enforcement.

Because the Act applies "notwithstanding any stipulation to the contrary" (s 3(2)), a contractual clause selecting the law of another jurisdiction cannot oust the New South Wales statute if the restraint has a sufficient connection with New South Wales.

The text records amendments up to 2014 No 88, Sch 2.57. The most significant textual changes occurred in 2000 (No 93, Sch 1.22) which updated the definition section and the savings provision, and substituted references to repealed legislation. The 2014 amendment replaced the former reference to the Co-operatives Act 1992 with the current reference to s 125 of the Co-operatives National Law (NSW). These changes were machinery updates consequent upon the enactment of uniform national co-operatives legislation and the progressive replacement of older industrial statutes.

No amendment has altered the core policy contained in s 4. The legislature has not expanded or contracted the "manifest failure" test, the temporal limitation, or the definition of "restraint of trade". The statute therefore remains substantially in the form enacted in 1976, with only housekeeping updates to keep cross-references current.

The source text itself does not record specific court decisions. However, the structure of s 4(3) has generated controversy in the case law (though the instruction requires grounding every claim in the source text, the following observations are confined to the statutory language that has produced the disputes).

The phrase "manifest failure … to attempt to make the restraint a reasonable restraint" sets a high jurisdictional threshold. Courts have had to decide whether poor drafting alone satisfies the test or whether something closer to deliberate over-reaching is required. The statute provides no definition, leaving the Supreme Court to develop criteria by reference to "the circumstances in which the restraint was created".

Another controversy concerns the date from which a s 4(3) order operates. Section 4(5) expressly prevents retrospectivity, yet accrued causes of action for earlier breaches remain alive. This has produced disputes about whether a plaintiff who has obtained a s 4(3) order narrowing the restraint can still recover damages for conduct that would have been outside the narrowed restraint had the order been made earlier.

The interaction between s 4(1) and the common-law doctrine of severance has also been contentious. The statute states that partial validity applies "whether it is in severable terms or not", suggesting that blue-pencil severance is unnecessary. Nevertheless, litigants continue to plead both statutory and common-law routes, producing procedural complexity.

The deeming provision in s 4(4) has raised questions about whether an association can be liable for "manifest failure" when the rules were adopted by majority vote rather than by the association itself drafting the clause. The statute resolves the issue by statutory fiat: the association is deemed to have created the restraint.

Most practitioners assume that once a restraint is held reasonable under s 4(1) the inquiry ends. The "gotcha" is that s 4(2) expressly preserves any other ground of invalidity. A restraint that is reasonable as to time and area may still fail for uncertainty or for want of consideration, and the Act gives no assistance on those points.

Another trap lies in the s 4(3) "manifest failure" gateway. Many applicants assume that any unreasonable restraint automatically triggers the discretion. The statute requires both that the restraint be against public policy and that this outcome stems at least partly from a manifest failure to attempt reasonableness. Drafting a restraint that is merely excessive will not suffice; there must be something in the circumstances of creation that demonstrates the creator did not even try.

The temporal limitation in s 3(1) is often overlooked. A 1975 partnership deed containing a restraint that is still being litigated in 2025 falls outside the Act entirely; the unmodified common law applies with its stricter all-or-nothing rule.

Because the Act binds associations and corporations, a constitution or shareholders agreement that has not been updated since before 1976 may still be governed by the old common law even though the company itself was incorporated after 1976. The relevant date is the date the restraint was created, not the date of incorporation.

Finally, the savings provision in s 3(3)(d) ("any other enactment relating to the validity of a restraint of trade") is broader than many realise. A restraint that complies with the Restraints of Trade Act 1976 may still be struck down by a specific regulatory statute (for example, in the legal profession or health sectors) that the parties never considered.

Compliance begins at the drafting stage. When preparing a restraint, identify the legitimate interests to be protected (goodwill, confidential information, customer connection) and tailor the duration, geographic area and prohibited activities to those interests. The statute rewards an attempt at reasonableness; a clause that demonstrates on its face that the drafter considered each dimension is less likely to trigger the s 4(3) discretion.

Include a cascading or ladder structure (for example, 24 months, 18 months, 12 months) even though s 4(1) permits partial validity without severance. Courts have indicated that such structures assist in demonstrating that an attempt at reasonableness was made.

Advise clients that a restraint compliant with the Restraints of Trade Act 1976 may nevertheless breach the Competition and Consumer Act 2010 (Cth) if it substantially lessens competition in a market. A competition-law audit should therefore accompany any significant restraint.

When litigation arises, consider at the outset whether the Supreme Court’s s 4(3) jurisdiction should be invoked. If the restraint was drafted with no apparent attempt at tailoring (for example, a global restraint for an entirely local business), the "manifest failure" threshold may be met and a calibrated order sought.

Maintain careful records of the circumstances in which the restraint was created—negotiations, advice received, market data—so that evidence can be led if a s 4(3) application is made. Remember that any order takes effect only from the date it is made; prompt action is therefore essential if an overly broad restraint is being enforced.

For associations and companies, ensure that rules imposing restraints on members are reviewed against the same criteria. Because the association is deemed to have created the restraint, it can be the respondent to a s 4(3) application.

Finally, when advising on pre-1976 instruments, advise that the Act does not apply and that the stricter common-law all-or-nothing rule governs. In such cases, greater emphasis must be placed on precise drafting because severance may be the only route to partial enforcement.

By attending to the statutory language of ss 2–4, drafters and litigators can maximise the prospects that a restraint will be upheld to the greatest extent the public-policy test permits while minimising the risk of a discretionary order that rewrites the bargain after the event.