Restraint of Trade Clause Example: Drafting Tips for Startups and SMEs

A restraint of trade clause can look simple on the page and still fail when it matters. Founders often copy a clause from an overseas template, make the restriction far too broad, or drop it into an employment or sale agreement without matching it to the real commercial risk. Another common mistake is trying to protect everything at once, customers, staff, suppliers, confidential information and general competition, without explaining why the restriction is needed.

In New Zealand, restraint clauses are not automatically enforceable just because both parties signed. The real question is whether the clause goes no further than reasonably necessary to protect a legitimate business interest. That is where startups and SMEs often get caught, especially before you sign a key hire, sell a business, bring in a contractor, or buy into a franchise or distribution model.

This guide explains what a restraint of trade clause example should actually include, how to tailor one for New Zealand use, where consumer, privacy and fair trading rules can still matter, and what to sort out before you rely on a clause in practice.

Legal Checklist

The strongest restraint clauses are tied to a specific business risk, not copied from a generic precedent.

• Identify the legitimate interest you are protecting, such as confidential information, client relationships, goodwill in a business sale, or stability of your workforce.
• Choose the right restraint type, for example non-compete, non-solicitation of clients, non-poaching of staff, or non-dealing restrictions.
• Limit the scope by time, area and activities so the clause is no wider than needed for the role or transaction.
• Match the restraint to the agreement, such as an employment agreement, contractor agreement, shareholder agreement, business sale agreement or franchise document.
• Make sure the restrained party receives proper value for agreeing, especially in a sale of business or equity transaction.
• Use clear definitions for customers, competing business, confidential information and restricted area, so the clause can be applied in real life.
• Check your surrounding documents, including confidentiality terms, IP ownership clauses, privacy policy disclosures and post-termination obligations.
• Review your sales, marketing and recruitment practices so they do not overstate what the clause does or create misleading expectations.

How To Set Up A Restraint of Trade Clause Example in New Zealand Legally

A legally useful restraint clause in New Zealand is usually narrow, role-specific and supported by a clear commercial reason.

Restraint of trade clauses are commonly used in employment agreements, contractor arrangements, business sale agreements, shareholder documents and franchise or distribution contracts. The legal treatment can differ depending on the context. A restraint given by a business seller is often easier to justify than one imposed on a junior employee, because the buyer is paying for goodwill and customer connections.

Before you sign a contract, ask a practical question: what are you actually trying to stop? If the answer is simply “competition”, the clause may be too broad. If the answer is “taking our client list, soliciting our top accounts and using pricing models built over two years”, that is more likely to point to a legitimate interest worth protecting.

What Makes A Restraint Clause More Likely To Be Enforceable?

The clause should protect a real business interest and go no further than reasonably necessary. New Zealand courts are generally cautious about restraints that stop someone working freely unless the restriction is justified.

The main factors usually include:

• the person’s role and seniority
• their access to sensitive information or key relationships
• the type of business and where it operates
• the time period of the restraint
• the geographic area covered
• the specific conduct being restricted

A six month non-solicitation clause for a senior account manager with direct client control may be easier to defend than a two year nationwide non-compete for a junior staff member.

A Simple Restraint Of Trade Clause Example

A restraint of trade clause example for a service business might separate different risks instead of using one sweeping ban. For example, an agreement may say that for six months after termination, the person must not:

• solicit clients they had material dealings with in the previous 12 months
• induce employees to leave the business
• use or disclose confidential pricing, strategy or customer information
• carry on a competing business within a defined area, but only if their role gave them access to strategic information and direct influence over those clients

That structure is often better than a blanket statement that the person cannot work in the industry anywhere in New Zealand.

Some clauses use cascading options for time periods or geographic areas, such as 3, 6 or 12 months and a city, region or nationwide area. These are intended to preserve a narrower version if a broader one is too wide. They can be useful, but they still need careful drafting. A badly designed cascade can create uncertainty rather than helping enforceability.

Which Agreements Commonly Need One?

Not every startup needs a restraint clause in every document. The right place depends on how your business is built and where the real risk sits.

• Employment agreements for senior team members with customer influence, strategic information or hiring power.
• Contractor agreements where independent contractors interact with your clients or handle sensitive know-how.
• Shareholders agreements where founders may exit and set up a competing venture.
• Business sale agreements where goodwill is a key part of the purchase price.
• Franchise and distribution agreements where territory, customer relationships and system know-how matter.

Before you spend money on setup, think about business structure too. If you plan to start a business in New Zealand through a company, your founder arrangements should line up with your restraint and confidentiality terms. A shareholder can damage value just as easily as an employee if the documents are silent.

Protect The Business Name And Brand As Well

A restraint clause does not replace brand protection. If you are investing in a business name, logo or product identity, sort out ownership early.

Before you invest in branding, consider:

• registering your company through the Companies Office if you will trade through a company
• checking whether your trading name conflicts with existing businesses
• applying for a trade mark if the brand is important to your growth plans
• making sure founders, staff and contractors assign IP created for the business

This matters because a restraint may stop certain conduct for a time, but it will not give you ownership of a brand, software asset or content library unless your documents say so.

Legal Requirements And Compliance Issues To Check

A restraint clause is mainly a contract issue, but other New Zealand legal requirements still shape how you use it and what you promise around it.

For many founders, the first legal step is not the restraint itself. It is choosing the right business structure, completing company setup and registration steps, and making sure your contracts reflect how the business actually operates. That is particularly important if you sell services online, collect customer data, or market your team as exclusive, specialised or tied to your business systems.

Do You Need Registration, Licensing Or Approval?

No specific licence or government approval is required just to use a restraint of trade clause in New Zealand. What you may need depends on the business you are running, not the clause itself.

For example, you may choose to register a company with the Companies Office, operate under a sole trader or partnership structure, or protect a brand through a trade mark application. Some industries also have sector-specific licensing or professional rules, and those need separate review before you sign customer or staff contracts.

Fair Trading Rules Still Apply

You cannot market your services or negotiate your contracts in a misleading way. The Fair Trading Act affects the statements you make about exclusivity, customer ownership, restrictions on workers, and what happens after a contract ends.

This is where founders often get caught. A business may tell a customer that only its team can provide support in a region, or tell a recruit they will never be able to work with certain clients again, when the contract does not actually support that claim. If the statement is misleading, the problem is bigger than poor drafting.

Before you rely on a verbal promise, make sure your written documents match what has been said in:

• recruitment discussions
• sales proposals
• customer terms
• franchise or distribution pitches
• founder negotiations

Privacy And Confidential Information Need Separate Treatment

A restraint clause is not a privacy policy and it is not a confidentiality regime. If your business collects client details, employee information, leads, usage data or online enquiry data, the Privacy Act 2020 may apply to how that information is collected, stored, used and disclosed.

That matters because many restraint disputes involve customer lists and contact databases. If you want to control who can access that information and how it can be used after departure, you should also have:

• clear confidentiality obligations
• internal access controls
• device and account return requirements
• privacy disclosures that reflect your actual data practices
• IP and database ownership terms where appropriate

Before you accept the provider's standard terms for software, CRM tools or outsourced support, check who owns uploaded data and whether former personnel can still access it.

Consumer Guarantees And Service Promises

If your startup or SME sells services to consumers, the Consumer Guarantees Act can affect the promises you make about performance and service continuity. A restraint clause does not excuse a failure to provide services with reasonable care and skill or within a reasonable time.

For example, if a customer buys services because they believe a named specialist will remain with your business, and your contract and marketing create that expectation, staff departures can trigger both commercial and consumer issues. Your service terms and marketing copy should avoid overstating personal exclusivity unless that is genuinely part of the deal.

Contracts, Online Sales And Growth Risks For Restraint of Trade Examples

The biggest practical risk is not having a restraint clause. It is relying on a clause that does not fit the way your business sells, hires, scales or stores information.

As your business grows, restraints interact with online terms, supplier agreements, contractor models, SaaS systems, investor negotiations and staff incentives. A clause that made sense when you had three clients may not work when you have a national customer base, remote workers and multiple channels.

Employment And Contractor Risks

Businesses often use the same clause for every worker. That approach can backfire. A junior administrator, a senior sales lead and a software contractor do not create the same risk profile.

Use tailored agreements and think about whether you really need:

• a non-compete clause
• a client non-solicitation clause
• a staff non-poaching clause
• confidentiality obligations
• gardening leave provisions
• IP assignment wording

Before you sign, map the person’s actual access to customers, systems and strategy. The narrower and more fact-based the clause, the more useful it is likely to be.

Online Business Models And Digital Access

If you sell online, customer relationships may be built through platforms, mailing lists, subscriptions and digital communities rather than face-to-face sales. Your contracts should reflect that reality.

For example, a non-solicitation clause may need to address direct contact through email lists, social channels, customer communities or account-based messaging tools. Confidential information may include analytics, ad audiences, conversion data, workflows and product roadmaps, not just a paper client list.

Before you register a domain or print packaging, also make sure your digital terms are lined up. That can include website terms, app terms, privacy disclosures, contractor terms and supplier agreements. A restraint clause works best as one part of a connected contract system.

Sale Of Business And Investment Deals

Restraint clauses often matter most when money changes hands for goodwill. In a sale of business, a buyer usually wants the seller to agree not to take back customers or launch a competing operation immediately after completion.

These clauses can be easier to justify because the restraint helps protect the value being purchased. Even then, the terms should still be sensible. A clause that bars a seller from any involvement in a very broad industry for too long may still be vulnerable.

If investors are coming in, check whether founder vesting, shareholder exit terms, IP ownership and restraint wording all work together. A weak founder agreement can create major risk later if someone leaves with code, customers and brand knowledge.

Common Drafting Mistakes

Most failed restraint clauses suffer from the same small group of drafting issues.

• The clause protects against ordinary competition instead of a specific legitimate interest.
• The restricted period is longer than the business can justify.
• The geographic area is copied from a template and does not match where the business actually operates.
• The activities are described too broadly, such as banning any involvement in a competing business.
• The agreement lacks supporting terms on confidentiality, IP, data access and return of property.
• The restraint is included for every person, regardless of role or bargaining context.

Another common problem is poor document timing. If you ask someone to agree after they have already started, or after a deal is largely done, enforceability and practical leverage can both weaken. It is usually better to deal with restraints before you sign, not after problems appear.

FAQs

Are restraint of trade clauses enforceable in New Zealand?

Sometimes. They are more likely to be enforceable when they protect a legitimate business interest and are reasonable in duration, area and scope.

What is a legitimate business interest?

Common examples include confidential information, customer relationships, workforce stability and goodwill being bought in a business sale. Preventing ordinary market competition on its own is usually not enough.

Is a non-solicitation clause better than a non-compete clause?

Often, yes. A non-solicitation clause is usually narrower and easier to justify because it targets client or staff poaching rather than stopping someone from working in the industry altogether.

Can I use the same restraint clause for employees and contractors?

Not usually. The clause should reflect the person’s role, the agreement type and the real risk to the business. One template for everyone often creates unnecessary enforcement problems.

Does a restraint clause protect my brand and IP?

No. You should also deal with trade marks, copyright, confidential information and IP ownership in your contracts and registration strategy.

Key Takeaways

• A restraint of trade clause example should be tailored to a specific business risk, not copied from a generic template.
• New Zealand restraint clauses are more likely to hold up when they protect a legitimate interest and stay reasonable in time, area and scope.
• Non-solicitation, confidentiality and IP clauses are often more practical than a very broad non-compete.
• Your restraint wording should match the agreement type, whether that is employment, contractor, shareholder, franchise or sale of business documentation.
• Business setup steps still matter, including company registration, brand checks, trade mark planning, privacy compliance and accurate marketing statements.
• Before you rely on a clause, make sure your customer terms, staff documents, data systems and internal processes support it in practice.

If you want help with drafting restraint clauses, reviewing employment and contractor agreements, protecting confidential information, and trade mark and IP ownership issues, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.