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:

Contract type

Extent of restriction

Valid?

Points to note

Business/Share sale

UK-wide non-compete; not to be interested or concerned in the business of the manufacture or sale of road reinforcements.

No

The target business was a small one so a national restriction was unreasonably wide

Business/Share sale

2 year, national non-compete.

Yes

 

Business/Share sale

17-month non-compete from date of share sale.

Yes

Only a 1.6% shareholder

Business/Share sale

4 year non-compete

Yes

 

Partnership

5 years, any similar or competing business (publishing)

Yes

 

Partnership

5 years; 10 miles (doctor)

No

 

Partnership

5 years (solicitor)

Yes

 

Partnership

5 years; 5 miles, not practise nor solicit clients (solicitor)

No

Salaried partner

Partnership

2 miles; 2 years (estate agent)

Yes

 

Shareholders’ Agr/ Joint Ventures

12 month non-compete

Yes

 

Agency and Distribution

12 month non-compete

No

 

Agency and Distribution

Lifetime of the agreement; 6 months post-termination within 5 mile radius

Yes

 

Exclusive supply

4.5 years and 21 years

Yes for 4.5 only

Esso Petroleum v Harper’s Garage. The efficiency of the distribution network and the need for secure outlets were legitimate business interests that could be protected

Franchise

3 years. No services within half a mile of the franchise premises or within 3 miles of any premises in the UK at which the service is carried on by another franchisee or the franchisor

Yes

Convenience Co v Roberts  The court said this case was not authority for the proposition that a restriction over a very wide geographical area in which the defendant has not traded can ordinarily be upheld.

Franchise

10 mile radius of franchise premises and any franchise outlet; 2 years.

In part

Upheld in respect of the franchise premises; struck out in respect of other franchise outlets. 2-year term upheld.

Franchise

12-month non-compete in franchise territory.

Yes

 

Franchise

Non-compete anywhere in the UK

No

 

Media and Entertainment

Publishing agreement; 5 year term, automatically extended if royalties exceed an agreed figure.

No

Inequality of bargaining position; possible "sterilisation" or freezing of artist's output.

Media and Entertainment

Management agreement requiring the artist to pay a percentage of earnings, including post termination.

Yes

 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.