AFAIK, the link should work fine with a network path - and you shouldn't change the filename.

So, to clarify:
After creating the link and checking the 'Update automatic links at open' option, you made a change to the 'Selling Restrictions.docx' file (I note you have two files with the same basic name - did you update the correct one?) and saved it? You then re-opened the target document 'Reference to Selling Restrictions.docx'? and it didn't update? Even pressing Ctrl-A, then F9 didn't generate an update?

__________________
Cheers,
Paul Edstein
[Fmr MS MVP - Word]