As with most business sales, the giving of restraints of trade by a vendor pharmacist is an important aspect of transferring the business goodwill to the purchaser. However, many would be surprised to know that a restraint of trade is on its face, contrary to public policy and as a result is legally unenforceable, unless it is established that the restraint is reasonable in the parties’ interests and also in the public interest.

General Principles
A restraint of trade is on its face, contrary to public policy and thus unenforceable unless the restraint is reasonable in the parties’ interests and also in the public interest. As the restraint needs to be reasonable in the interests of both parties a Court (if required to adjudicate) will consider the whole sale transaction including all surrounding circumstances, noting that the validity of the restraint will be assessed at the time the restraint was imposed (ie. when the sale agreement was signed) and not when the restraint is sought to be enforced.

The purchaser has the onus of proving that the restraint is reasonable in the parties’ interests while the vendor (as the party subject to the restraint) has the onus of proving that it is against the public interest.

From a purchaser’s perspective it is not sufficient simply to argue that as the vendor agreed to the restraint appearing in the contract then the restraint is enforceable. Although a Court will give weight to this aspect, a Court determines if a restraint is reasonable by considering the entire evidence and all the circumstances and is not bound by the parties’ opinion or agreement.

The 3 main limitations which are required in most types of restraint of trade, to ensure that the restraint is reasonable, relate to:

  • the scope of the activity prohibited
  • the duration of the restraint; and
  • the area within which the restraint operates.

Issues in drafting Restraints
From a buyer’s perspective, drafting a restraint poses considerable legal difficulties upon a buyer’s lawyer in order to ensure that the restraint covers the practical needs of their client without being at risk of being too wide and hence invalid.

It is important to note that a vendor’s lawyer traditionally prepares the draft sale agreement including the draft restraint of trade. Accordingly, a buyer should ensure that his lawyer carefully considers his interests and needs and such lawyer should be encouraged to submit substantial amendments to the restraint clause while the sale agreement is being negotiated.

A practical drafting difficulty for buyers when giving instructions to their lawyers arises because:

  • the buyer being new to the business cannot define with adequate precision the interest requiring protection or the trading area which should be covered by the restraint;
  • certain external factors, eg. position and frequency of competing businesses within the suggested restraint area and population distribution density involve matters of fact which can’t always be accurately determined at the outset;
  • it is obviously difficult to accurately forecast what a Court will regard as reasonable in the circumstances (ie. for that specific pharmacy business being bought) as this is a question of law.

Drafting techniques to overcome unenforceability
As mentioned above, if a Court finds that the restraint is unreasonable then it will be unenforceable, unless the Court is able to sever or remove the invalid part of the restraint so that the balance of the restraint remains enforceable. To allow for this possibility, lawyers frequently draft a covenant in a restraint of trade with variable restraints (often called a cascading restraints clause). This type of restraint clause effectively refers to a number of different restraint periods (eg. 3 years, 2 years and 1 year from the settlement date) and a number of restraint areas (eg. 7 kilometres, 6 kilometres and 5 kilometres from the business premises) with the clause drafted so that each possible combination of time and distance applies to create several separate restraints.

It is important to note that:

  • in framing such restraints there still needs to be a genuine attempt to define the scope of protection reasonably needed by the purchaser;
  • the more numerous the variables contained in the restraint clause the more likely it is that a Court may still strike down the entire clause.

Careful Analysis of Circumstances
A purchaser needs to carefully consider and analyse the particular circumstances of the business being purchased in order to determine the appropriate restraint of trade which is necessary. Some key issues include considering the following:

  • who are the vendor;s customers and where do they reside;
  • where do customers obtain their scripts from and where are these medical practices located;
  • how do customers purchase the vendor;s products or services;
  • should the vendor be restrained from dealing with existing or former customers;
  • is there any need to protect the purchaser against employees being enticed from the business.

Finally, depending on the size of the pharmacy business, a purchaser needs also to consider whether it is appropriate to obtain a separate restraint of trade from a key employee, eg. the manager of the pharmacy business at the same time.

Conclusion
It is important for both buyers and sellers to obtain specialist legal advice regarding the issue of an appropriate restraint of trade. Simply relying on the usual wording appearing in standard copyright agreements for sale of business (which are issued by the various Law Institutes or Law Societies of each State) is not recommended, noting that these standard agreements only provide for a single restraint of trade specifying a single period of time and distance from the business premises. Therefore, if the single time and distance nominated by the parties is determined to be unreasonable by a Court then the whole restraint clause is invalid and thus unenforceable.

Prepared by
Anthony Cannizzo
Partner
Robert James Lawyers
Level 10, 200 Queen Street
Melbourne Vic 3000

E-mail: anthony@robertjames.com.au
Web site: www.robertjames.com.au
Tel (03) 8628 2000
Fax (03) 8628 2050