Restraint of Trade Agreement (New Zealand)

A Restraint of Trade Agreement (New Zealand) is a legally binding contract under the Contract and Commercial Law Act 2017 and the Employment Relations Act 2000 by which one party — typically a departing employee, contractor, or vendor of a business — agrees not to compete with, solicit clients from, or solicit employees of another party for a defined period and within a defined geographic area in New Zealand.

Restraint of trade agreements in New Zealand occupy a distinctive legal position. Under the common law principle applied by New Zealand courts — including the High Court of New Zealand and the Employment Court — all restraints of trade are prima facie void as contrary to public policy unless the party seeking enforcement demonstrates that the restraint is reasonable between the parties and not contrary to the public interest. This foundational rule reflects New Zealand's constitutional commitment to freedom of trade and economic mobility, values that are reinforced by the Employment Relations Act 2000's good faith obligations and by Parliament's deliberate decision not to codify restraints of trade in the Contract and Commercial Law Act 2017.

There are three main contexts in which restraint of trade agreements arise in New Zealand. The first and most common is post-employment restraints, in which an employer seeks to prevent a departing employee from joining a competitor, establishing a competing business, or soliciting the employer's clients or staff after their employment ends. Employment restraints are examined by the Employment Court under the Employment Relations Act 2000 and by the High Court under the Contract and Commercial Law Act 2017, and must satisfy the reasonableness test in the specific context of the employment relationship.

The second context is independent contractor restraints, where a principal party seeks to restrict a contractor's activities after the engagement ends. While the contractor relationship is not governed by the Employment Relations Act 2000 in the same way as employment, New Zealand courts apply the same reasonableness analysis to contractor restraints as to employment restraints — and contractors enjoy slightly more commercial bargaining leverage than employees, meaning courts apply marginally less protective scrutiny.

The third and most permissive context for New Zealand restraint enforcement is business sale restraints, where a vendor selling the goodwill of their business to a purchaser agrees not to compete with that business for a defined period. Because the vendor has received full commercial value for the goodwill — and competition by the vendor would undermine the value of what the purchaser has paid for — New Zealand courts are more willing to enforce business sale restraints of 2 to 5 years covering the geographic area in which the business operated. The Contract and Commercial Law Act 2017 and the Commerce Act 1986 provide the legal framework for business sale restraints.

A well-drafted restraint must identify the protected interests with precision: client relationships built using the employer's resources, confidential information about pricing and strategy, and trade secrets developed at the employer's expense are all legitimate interests that may justify a reasonable restraint under New Zealand law. A bare desire to prevent competition, without any identifiable proprietary interest, will not sustain an enforceable restraint in New Zealand courts. The Privacy Act 2020 also intersects with restraint agreements where confidential information includes personal data about clients or staff.

A Restraint of Trade Agreement is needed in New Zealand whenever a business wishes to protect legitimate proprietary interests from being exploited by a departing employee, contractor, or business vendor. The agreement should be put in place proactively — at the start of the employment or contractor relationship, or as part of a business sale transaction — rather than reactively after a breach has already occurred.

For new hires in senior, client-facing, or technically specialised roles — including sales managers, software developers with access to proprietary systems, key account managers, and executives with strategic knowledge — a restraint should be included in the employment agreement from the start. Under the Employment Relations Act 2000, good faith requires the employer to explain the restraint to the employee and to give the employee a reasonable opportunity to seek legal advice before signing. Where the employee is represented by a union, the union may negotiate restraint terms on their behalf.

For existing employees whose roles change — through promotion, transfer to a new business unit with access to sensitive information, or assignment to a key account — it may be appropriate to introduce or strengthen a restraint clause to reflect the new level of access to confidential information and client relationships. Additional consideration must be provided to make the new clause enforceable under New Zealand contract law.

For independent contractors engaged through a contractor agreement, a restraint clause prevents the contractor from using client contacts and confidential information gained during the engagement to establish a competing business or to provide services directly to the principal's clients after the engagement ends. Given New Zealand's active contractor market — particularly in IT, engineering, construction, and professional services — contractor restraints are increasingly common.

For business sales where goodwill is a significant part of the purchase price, the restraint of trade agreement is an essential component of the sale documentation alongside the asset purchase agreement or share purchase agreement. A purchaser who pays for client goodwill must protect that goodwill through a vendor restraint that prevents the vendor from immediately re-establishing a competing business in the same market.

In all these contexts, the restraint agreement should be reviewed by a New Zealand employment lawyer or commercial solicitor before execution to confirm that the duration, geographic scope, and scope of activities restrained are reasonable and defensible in the New Zealand courts.

A well-drafted Restraint of Trade Agreement (New Zealand) must include specific provisions that satisfy the reasonableness test applied by the High Court of New Zealand and the Employment Court under New Zealand law.

The parties clause must identify the employer, principal, or purchaser (the protected party) and the employee, contractor, or vendor (the restrained party) with full legal names, addresses, and NZBN numbers for entities. The relationship between the parties — employment under the Employment Relations Act 2000, contractor engagement, or business sale under the Contract and Commercial Law Act 2017 — should be clearly stated.

The protected interests clause is the foundation of any enforceable restraint. It must identify with specificity the proprietary interests being protected — for example, named key client accounts, defined categories of confidential information including pricing models and technical specifications, trade secrets developed at the employer's expense, or the goodwill acquired in a business purchase. A generic statement that the employer has confidential information is insufficient; the clause must describe what specific information or relationships justify the restraint.

The non-compete clause must define the restricted activities precisely — listing the specific types of competing business, the geographic area (by region, city, or defined radius from the employer's premises), and the duration. Standard durations for employment restraints in New Zealand range from 6 to 12 months. Business sale restraints may extend to 2 to 5 years in appropriate cases.

The non-solicitation of clients clause should identify the protected clients by category or by reference to a defined client list — for example, clients with whom the employee had direct contact in the 12 months before termination — and the period during which those clients may not be approached. The restraint should apply to active solicitation rather than passive acceptance of approaches from former clients.

The non-solicitation of employees clause prevents the restrained party from recruiting or encouraging the protected party's employees to leave their employment. This clause protects investment in staff training and development and is generally well-regarded by New Zealand courts as a reasonable protective measure.

The confidential information clause should confirm the restrained party's ongoing obligations under the Privacy Act 2020 and under any separate non-disclosure agreement, and should define what constitutes confidential information versus information that is in the public domain.

The consideration clause must record the consideration given in exchange for the restraint — for new employees, this is the employment offer; for existing employees, the additional benefit received; and for business vendors, the purchase price. Without adequate consideration, the restraint is unenforceable under New Zealand contract law.

The severance clause should provide that if any part of the restraint is found to be unenforceable by the High Court of New Zealand or the Employment Court, the remainder continues to apply to the extent enforceable. New Zealand courts will sever unreasonable provisions rather than invalidating the entire agreement if a valid severance clause is included. Section 7 of the Contract and Commercial Law Act 2017 confirms the general principle that contractual terms are severable where a contract is in part unlawful. Section 4 of the Employment Relations Act 2000 requires all parties to an employment relationship to act in good faith, including when negotiating and enforcing restraint clauses. Section 27 of the Commerce Act 1986 prohibits arrangements that substantially lessen competition in a New Zealand market, and overly broad restraints may attract scrutiny from the Commerce Commission.

The governing law clause should confirm that the agreement is governed by the laws of New Zealand. Employment restraints are subject to the jurisdiction of both the High Court of New Zealand and the Employment Court under the Employment Relations Act 2000. The forms-legal.com Restraint of Trade Agreement (New Zealand) provides a ready-to-use template that meets the reasonableness requirements applied by New Zealand courts.