Restraint Of Trade In New Zealand: Enforceability And Exit Options

Note: This article provides general information for New Zealand businesses and isn’t legal advice. Restraint of trade enforceability is highly fact-specific, so it’s worth getting advice on your particular clause and situation.

If you’re building a small business, your relationships are everything - your customers, your suppliers, and your people. But if a key team member walks out and takes your client list with them, it can seriously hurt.

That’s where restraint of trade clauses can help. Used properly, they can be a smart risk-management tool to protect what you’ve built. Used poorly, they can be expensive, unenforceable, and a distraction that damages trust inside your business.

This guide explains what a restraint of trade is in New Zealand, when it’s enforceable, the common mistakes business owners make, and what you can do if you need to enforce (or unwind) one.

What Is A Restraint Of Trade (And Why Do Businesses Use Them)?

A restraint of trade clause is a contractual term that limits what someone can do after their relationship with your business ends. In practice, it’s most commonly used in:

• Employment agreements (e.g. stopping a senior employee from joining a competitor immediately);
• Contractor agreements (e.g. stopping a contractor from directly approaching your clients after a project); and
• Business sale agreements (e.g. stopping the seller from opening a competing business and taking the goodwill you paid for).

In plain terms, restraints are meant to protect your legitimate business interests - things like:

• client or customer relationships your business has built;
• confidential information (pricing, proposals, systems, supplier terms, marketing plans);
• trade secrets and know-how;
• the stability of your workforce (e.g. preventing poaching of key staff); and
• goodwill (especially when you’re buying or selling a business).

Even though people often call them “non-compete” clauses, a restraint of trade is broader than just “don’t work for a competitor”. It can cover multiple types of restrictions.

Common Types Of Restraint Of Trade Clauses

Most restraints of trade fall into one (or more) of these categories:

• Non-compete: restricting someone from working in a competing business (or starting one) for a period of time.
• Non-solicitation: restricting someone from approaching your clients/customers (sometimes even if the client approaches them first).
• Non-dealing: restricting someone from doing business with your clients/customers, whether or not they solicited them.
• Non-poaching: restricting someone from recruiting your employees or contractors.
• Confidentiality obligations: restricting the use or disclosure of confidential information (these often sit alongside restraints and can be ongoing).

As a business owner, the key idea is this: you’re not trying to stop someone from earning a living - you’re trying to stop unfair use of what your business paid to develop.

When Is A Restraint Of Trade Enforceable In New Zealand?

In New Zealand, restraints of trade aren’t automatically enforceable just because they’re written into an agreement and signed.

Generally, a restraint needs to be reasonable and necessary to protect a legitimate business interest. If it goes too far, a court may refuse to enforce it.

In some cases, the court may enforce only part of a restraint (for example, by severing an unreasonable part, or modifying it under relevant legislation) - but you shouldn’t assume the court will “fix” a poorly drafted clause for you. That’s why the drafting matters so much. A generic “12 months, nationwide, no working in the industry” clause might feel protective, but it can be exactly the sort of clause that gets challenged.

What “Reasonable” Usually Means In Practice

Reasonableness depends on the context. Courts tend to look at things like:

• Duration: How long does the restriction last (e.g. 3 months vs 12 months)?
• Geographic area: Is it limited to where your business actually operates (e.g. Auckland) or is it nationwide without justification?
• Scope of activities: Does it only restrict the specific activity that competes with you, or does it ban the person from working in the entire industry?
• The role and access: Did the person have access to key clients, pricing, strategy, or confidential information?
• Your business interest: What exactly are you protecting - and can you explain it clearly?

A restraint of trade is far more likely to be enforceable for a senior person with deep client relationships and access to sensitive information than for a junior role with limited exposure.

The Type Of Relationship Matters (Employee Vs Contractor Vs Seller)

Restraints are often treated differently depending on the commercial context:

• Employment: Courts tend to scrutinise restraints closely because there’s a power imbalance and the employee’s ability to earn an income is at stake.
• Contracting: Often more flexible than employment (especially if the contractor is genuinely operating independently), but the restraint still needs to be reasonable.
• Sale of business: Restraints can be broader because the buyer is paying for goodwill and needs protection that the seller won’t undermine the value of the sale.

If you’re using restraints in your team, it’s important they sit inside a well-drafted Employment Contract (or contractor agreement) that clearly defines duties, confidentiality, IP ownership, and what happens on exit.

What Makes A Restraint Of Trade Clause Risky Or Unenforceable?

For small businesses, the biggest problem we see is not that restraints are “bad” - it’s that they’re often copied from somewhere else and don’t reflect how the business actually works.

Here are common issues that can make a restraint of trade clause hard to enforce.

1. It’s Too Broad For Your Actual Business

If your business operates locally (or in a niche service), a restraint that covers all of New Zealand or all possible services in your industry can be difficult to justify.

Courts generally want to see that the restraint is tailored to the specific risk to your business - not written as a blanket ban “just in case”.

2. It Tries To Protect Something That Isn’t A “Legitimate Business Interest”

You can’t use a restraint of trade simply to eliminate competition or “lock in” staff. The restraint needs to protect something real, like:

• your confidential information;
• your established client connections;
• your goodwill; or
• your workforce stability in a way that’s commercially justified.

That’s also why it’s smart to include strong confidentiality provisions (often separate to restraints) via a properly drafted Non-Disclosure Agreement where appropriate, especially for contractors, senior hires, or external collaborators.

3. It Doesn’t Match The Person’s Role

A restraint that might be reasonable for a sales manager with a portfolio of key accounts may be unreasonable for a junior admin role.

One size rarely fits all - and that’s often what gets businesses into trouble when they rely on a template.

4. It’s Not “Layered” Or Flexible

A common drafting technique is to include “cascading” options (sometimes called step-down provisions) for time and geography - for example, 12 months/6 months/3 months, and nationwide/region/city.

Used carefully, this can give a court more workable options if it decides the broad version is too much. But cascading clauses aren’t a cure-all: if the overall restraint is unjustified, or the drafting is unclear, a court may still decline to enforce it (and may not simply choose a “reasonable” option). If your clause is “all or nothing”, you’re taking a bigger risk.

5. The Rest Of Your Contractual Protections Are Weak

Restraints of trade are not a substitute for good contracts and good business processes.

For example:

• If your confidentiality clause is vague, you may struggle to prove what was “confidential”.
• If your IP ownership terms are unclear, you may have disputes about who owns templates, code, designs, or content.
• If your exit process is messy, you may lose the practical ability to protect client relationships (handover notes, client comms, device returns).

Getting the fundamentals right early can save you from leaning too heavily on a restraint later.

How Should Small Businesses Draft A Restraint Of Trade Clause That Actually Works?

If you want a restraint of trade clause that’s more likely to hold up, the goal is simple: make it specific, justified, and proportionate.

Below is a practical approach you can use to sanity-check a restraint before you put it in front of someone to sign.

Step 1: Identify What You’re Protecting (In One Sentence)

Ask yourself: what is the real risk?

• Is it that they’ll take your top 10 clients?
• Is it that they know your pricing structure and margins?
• Is it that they’ll poach your only trained technician?
• Is it that you’re buying a business and paying for goodwill?

If you can’t clearly describe the interest you’re protecting, the restraint is more likely to be “just competition prevention”, which is risky.

Step 2: Choose The Lightest Restriction That Solves The Problem

In many cases, a non-solicitation or non-dealing clause (plus strong confidentiality obligations) may protect your business better than a broad non-compete.

A non-compete is typically the most restrictive option, so it also attracts the most scrutiny. If you only need to protect clients, focus the clause on clients.

Step 3: Tailor Duration And Geography To Your Sales Cycle

A helpful business test is: how long would it take for you to replace that relationship or reduce the risk?

• If your client contracts renew every month, a 12-month restraint may be hard to justify.
• If your sales cycle is 6–9 months, a shorter restraint might not protect you.

The point is to connect the restraint to commercial reality - not a standard number.

Step 4: Make Sure Your Agreements Match Your Structure

If you run your business through a company (or you’re planning to bring on investors later), it’s worth keeping your documents consistent across the board.

That can include a fit-for-purpose Company Constitution and, where relevant, a Shareholders Agreement for founder and shareholder exits. While those documents aren’t “restraints of trade” in the employment sense, they often deal with related risks like confidentiality, departing founders, and protecting business value.

Step 5: Don’t Forget Practical Protections

Courts and disputes aren’t where you want to spend your time. Strong operational controls can often do a lot of the heavy lifting, such as:

• restricting access to client lists and pricing to those who truly need it;
• having clear CRM ownership and offboarding steps;
• ensuring devices are returned and accounts are closed immediately; and
• documenting client allocation and internal account ownership.

In other words: legal protection + good systems = the strongest position.

How Do You Get Out Of A Restraint Of Trade In NZ (Or Reduce The Risk If One Is Triggered)?

From a small business perspective, “getting out of a restraint of trade” usually comes up in two situations:

• You’re hiring someone and they’re bound by a restraint of trade from their previous role.
• You’re exiting a deal (for example, a contractor arrangement is ending, or you’re buying/selling a business) and a restraint becomes contentious.

Either way, this is one of those moments where getting advice early can prevent a lot of cost later - because the wrong step can turn a manageable risk into an urgent dispute.

1. Start By Reading The Clause Properly (And The Whole Contract)

It sounds obvious, but restraints are often misunderstood because people only read the “headline” line.

Check for details like:

• When does the restraint start - on resignation, on last day, or after notice is served?
• Does it apply if the relationship ends due to redundancy or termination without cause?
• Is it tied to a certain role, territory, or client group?
• Is it a non-solicit (often easier to manage) or a full non-compete (higher risk)?

Also check related clauses: confidentiality, return of property, IP, non-disparagement, and dispute resolution.

2. Work Out Whether It’s Likely To Be Enforceable

Not every restraint of trade is enforceable in practice.

If it’s overly broad (time, geography, scope), not connected to a genuine protectable interest, or inconsistent with the role, it may be vulnerable to challenge.

That doesn’t mean you ignore it - it means you make informed decisions before you hire, onboard, or let someone start contacting clients.

3. Consider A Written Variation Or Release

In many real-world situations, the cleanest solution is negotiation.

If you’re hiring someone with a restraint of trade, you may be able to:

• agree they won’t deal with certain clients for a set period;
• adjust their responsibilities to avoid competition risk (at least initially); or
• obtain a written release or variation from the previous business.

Getting it in writing matters. Verbal “don’t worry about it” conversations can quickly become disputed later.

4. Build A “Safe Role” For The First Few Months

If you want to reduce the risk of a restraint dispute, think practically about what the person does day-to-day.

For example, you might structure their role so they:

• don’t approach their former clients;
• don’t work in the same territory;
• focus on internal operations, delivery, or a different service line; and
• avoid using any materials that could be confidential to their former employer.

This can be a useful risk-control measure while you clarify enforceability or negotiate a release.

5. If You’re The Business Being Protected: Don’t Wait Too Long To Act

If someone is breaching a restraint of trade and you delay action, that can weaken your position commercially (and in any dispute), because the damage can grow quickly.

If you suspect a breach, it’s usually worth getting advice early on your options - including what evidence you should preserve and what communications you should (and shouldn’t) send.

In some cases, businesses resolve this through a formal Deed Of Settlement, which can set clear boundaries (and consequences) without escalating into a long dispute.

Key Takeaways

• A restraint of trade clause is a contractual restriction that can limit competition, client solicitation, client dealing, or staff poaching after a business relationship ends.
• In New Zealand, restraints of trade aren’t automatically enforceable - they usually need to be reasonable and protect a legitimate business interest like client relationships, confidential information, or goodwill.
• Restraints are more likely to be enforceable when they’re tailored to the person’s role and limited by time, geography, and scope (rather than broad “blanket bans”).
• Common mistakes include using template clauses, applying senior-level restraints to junior roles, and relying on non-competes when a narrower non-solicit plus confidentiality would work.
• If a restraint becomes an issue (for example, when you’re hiring someone), options can include assessing enforceability, negotiating a written release/variation, and structuring a lower-risk role temporarily.
• Strong legal foundations matter - pairing restraints with clear confidentiality terms, good onboarding/offboarding processes, and properly drafted agreements will better protect your business from day one.

If you’d like help drafting or reviewing a restraint of trade clause (or managing restraint risk when hiring or exiting a key person), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.