Restraint Of Trade Clauses
Contractual clauses that restrain trade in one form or another are particularly common in employment contracts and contracts involving the sale of a business. The rationale behind a restraint of trade clause in an appropriate contract, is to attempt to avoid the detrimental effects of an employee or a former business owner operating without regard for the interests of a former employer or the new purchaser of a business.
While restraint of trade clauses are a useful protection for an employer or the purchaser of a business, they are vulnerable as they can be challenged by the person subjected to the restraint if the restraint is unreasonable. A restraint of trade clause has the effect of limiting a person’s freedom to carry on a trade or profession. Society as a whole might also be deprived of the skills and talents that person possesses. On that basis, restraint of trade clauses are at risk of being considered void for being contrary to public policy and a restriction on individual freedom, unless the person seeking to enforce the clause is able to show that the clause is reasonable.
Reasonable Restraining Clauses
Reasonable, in this context, means that the restraint must not be greater than necessary to protect the legitimate interests which the clause is designed to protect. What is reasonable is determined by examining the duration and the geographical constraints of the particular clause. Therefore, a restraint over an unrestricted geographical area and for an unrestricted time-frame would most likely be unreasonable and as a result, unenforceable. An enforceable restraint clause would ideally have defined geographical boundaries and time limits. Such constraints might well cover a large area or be lengthy in time, depending on the type of business or employment and the need for protection.
Standard employment contracts can, and often do have, clauses restraining an employee from divulging or using sensitive information belonging to the employer. Such information would need to have been disclosed by the employer for use in the course of the employee’s employment and for the benefit of the employer.
An employer may not however, restrain an employee’s freedom to use knowledge and skills which have been acquired by the employee in the ordinary course of employment. An employer does not have a proprietary interest in the employee’s naturally developed skills. Conversely, manufacturing secrets, client lists or data belonging to the employer may become the subject of an enforceable restraint of trade clause.
Many business sales involve an element of goodwill in the purchase price. In many circumstances, that goodwill has been generated by the vendor’s personal involvement in the business. The purchaser, in agreeing to pay goodwill, will be hoping to retain and protect the existing client base for long enough to establish an independent standing for himself or herself in the business. Restraint of trade clauses aim at providing the necessary protection by prohibiting the vendor from competing with the purchaser after the business has been sold to the purchaser.
In this context, the restraint of trade clause may only apply to the vendor’s type of business, and again, the geographical area and time restraints must be reasonable. The nature of the business being protected and the wideness of the customer base will be relevant issues in arriving at what is reasonable in the circumstances.
Restraint of trade clauses are a useful tool for the protection of business interests, particularly if you are purchasing a business. However, the law generally views such a clause as being void or unlawful unless it can be shown that the scope of the clause is reasonable at the time the clause was agreed upon by the parties to the contract. We advise you to seek legal advice to ensure that a desired restraint of trade clause will give you the future protection you may need.