Restraints of trade – not all roses in commercial dealings

Commercial documents frequently contain restraints of trade designed to protect a party’s commercial interests. In this article, Richard Suters, Principal of the Corporate and Commercial team discusses the validity of restraint of trade provisions and how to avoid your restraint being successfully challenged.

The New South Wales Court of Appeal recently examined restraint of trade provisions in the context of importation and sale of flowers at the Sydney Flower Market in the case of Belflora Pty Ltd v Vinflora Pty Ltd.

The two parties operated a joint venture business, Belflora International, that mainly imported roses from South America and Kenya. When the business partnership dissolved, the parties agreed (without legal assistance) to give one another exclusive rights and impose the following restraints:

• Belflora Pty Ltd (Belflora) was to have the exclusive right to import flowers from South America and Vinflora Pty Ltd (Vinflora) was to have the exclusive right to import flowers from Kenya; and
• neither party could purchase flowers from the restrained regions except from the other, and only then for the purposes of fulfilling orders, not for displaying for sale.

The rationale of the arrangement was to avoid Belflora and Vinflora competing with one another to sell the same flowers at the market, by having ‘identical stands’. It would also provide a basis for the ex-business partners to launch their new businesses with the commercial advantage of exclusive dealing. However, Vinflora subsequently started importing and selling South American flowers in breach of the restraint, so Belflora sought to enforce the restraint by injunction.

In order for a restraint of trade to be valid, it must be reasonably necessary to protect the legitimate business interests of a party, and it must not be contrary to the public interest. In this case, the New South Wales Court of Appeal found that neither of these conditions were satisfied.

The court found that Belflora had failed to establish any legitimate business interest warranting protection.  In particular, the restraint was not seeking to protect a specific relationship between Belflora and an identified supplier or valued customer, but rather it sought to restrain Vinflora from dealing with suppliers from a whole continent.  The mere protection of Belflora from competition was not a legitimate interest, able to be protected.  The position was exacerbated by the prohibition on Vinflora purchasing South American flowers from anyone other than Belflora.

The court also considered it was not in the public interest to prohibit competition without any overarching public benefit in such a niche market.

Bathurst CJ rejected several submissions by Belflora holding that the fact that the parties considered it to be beneficial to have mutual restraints against competition did not mean the restraints were valid. Nor did the fact that the restraints were freely bargained for provide sufficient reason for concluding that the basic common law doctrine (that a restraint of trade is contrary to public policy unless it reasonably necessary to protect the interests of the parties and is reasonable in the interests of the public) should not apply. He also considered the issue of whether Vinflora benefited from the restraints to a greater degree than Belflora to be immaterial.

This case demonstrates that any attempts to restrict commercial activity through the use of restraints of trade need to be navigated carefully. While a restraint of trade may be enforceable in specific circumstances, a party seeking to enforce must be able to demonstrate a clear and legitimate business interest, the restraint must be reasonable as between the parties and it must not be contrary to the public interest, The bar is set quite high.

Our Corporate and Commercial team regularly advise on commercial documents and can assist in drafting, reviewing and advising on restraints of trade. If you require any advice, please do not hesitate to contact us.

This article was co-written by Madeline Tait, Lawyer.