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Restraint of Trade clauses - are they really enforceable?
Restraint of trade clauses appear in numerous contracts and are designed to protect a business by limiting competition with that business; this is usually achieved by restricting another business or individual from activity that would assist them to compete. This could include preventing another business from actively seeking work from your customers, enticing your employees to work for them, or setting up the same or a similar type of business nearby.
Such clauses will appear in contracts for the sale of a business, partnership agreements, agency and distributorships agreements, exclusive supply agreements, franchise agreements, consultancy agreements and many others. Essentially, any contractual relationship where the departing party has in depth knowledge of the continuing party’s business and customer base.
But do restraint of trade clauses work?
Yes – but only provided they:
- Are designed to protect a legitimate business interest (e.g. trade connections, goodwill, investment)
- Are no wider that is reasonable to protect the interest (e.g. the length, area covered and scope of the restriction are reasonable in the particular circumstances)
- Are not contrary to the public interest (e.g. consumer interests)
If these criteria are not met, then a restraint of trade clause will be void and unenforceable. Case law shows that what is regarded as reasonable will vary dependent upon the nature of the contract; so what might be reasonable in one context will be unreasonable in another. The key is to properly consider the context of the restriction, and the supporting case law, to identify the parameters of any restraint clauses. The following are examples of the difference that context makes: