Employment contracts, especially for senior or executive employees, often contain clauses which restrict the employee, upon termination of employment, from:
- soliciting other employees to leave their employment, for a defined period of time;
- soliciting clients of the employer, for a defined period of time;
- engaging in competition with the former employer in a defined geographical area for a defined period of time.
Such clauses are commonly known as ‘restraint of trade’ clauses.
They also feature in many sale of business contracts to protect the interests of the purchaser of the business, including any intellectual property and goodwill which may have been purchased.
Disputes can arise regarding the enforceability of restraint of trade clauses, because the Courts regard such clauses as void and therefore unenforceable, unless they are reasonable to protect the interests of the parties concerned, and the interests of the public.
The purpose of the law regarding restraints of trade is essentially to prevent trade and commerce from being unnecessarily restricted. However the doctrine also extends to the protection of non-economic interests.
I have set out below some of the legal principles that the Courts apply in restraint of trade disputes.
- It is necessary to examine the range of interests which the restraining party says requires protection and then to determine whether one or more of those interests is reasonable by reference to the interests of the parties to the contract and the interests of the public.
- A restraint of trade is reasonable in relation to the restraining party if it is necessary for the adequate protection of that party and reasonable in relation to the party restrained if it preserves the fullest liberty of action consistent with that protection.
- The validity of a restraint of trade must be decided at the date the contract was entered into, not at the time the dispute arose.
- However subsequent developments can be considered to determine whether the restraint was reasonable to make at the date of the contract, having in mind the best estimate the parties could make for the future. This means that a restraint might go further than protecting what ultimately turns out to be the legitimate interest of an employer.
- It is usually necessary for the restraining party to justify the restraint by reference to its customer relationships and/ or its confidential information. Often the need to protect customer relationships is closely connected to the potential misuse of confidential information.
- It is not necessary to precisely identify the confidential information (as at the date of the contract), provided there is the potential for confidential information to be used to the detriment of the restraining party.
“Feel free to contact me if you require assistance on a restraint of trade question or dispute.”