What is a Restraint of Trade

If you are looking at a contract, it is likely that there is a clause labeled ‘restraint of trade’. So what is restraint of trade? This article will offer a brief explanation about the concept of restraint of trade; including what it is and how it operates, if you notice it on a contract you are signing. 

What is restraint of trade?

On the face of it, a restraint of trade is where ‘one party agrees with another to restrict their liberty in the future to carry on trade with other persons that are not parties to the contract in such a manner as he chooses’. Restraint of trade clauses are generally found in employment contracts, contracts engaging businesses and contracts within sale. These clauses are mainly used to stop the poaching of employees, soliciting clients from other businesses or disclosing confidential information. 

What are the different versions of a restraint of trade clause?

There are different versions of a restraint of trade clause. These include:

  • Non-competition clauses which prevent former employees from working for competitors,
  • Non-solicitation clauses which prevents the other party from approaching an employer’s clients,
  • Non recruitment clauses which prevent a former employee from poaching other employees from a company, and 
  • Confidentiality clauses which prevent confidential information and trade secrets (these can also be protected under a different area of law, specifically equity, but it is a good idea to have as many safeguards as possible to make sure your information is kept safe). 

Are restraint of trade clauses generally void?

 At law, all restraints of trade are void unless it can be shown that it is reasonable in the interests of the parties, that it is no more than necessary for the protection of an employer’s valid business interests. 

Generally, the party who wishes for the restraint of trade clause to be in the contract, is the party who must justify its value in the interests of both parties. Generally, the person wishing for the restraint of trade clause to be placed in the contract is not the person who is being restrained. When also considering reasonableness, the court must take into account what is being exchanged for the restraint of trade and the bargaining power of each party. Thus, the more burdensome and costly a restraint is, the more that will need to be exchanged in order for it to be reasonable to the parties. Elements which could be included in a restraint clause include the amount of time restrained (known as a restraint period), the area in which it is operating in, and the activities covered. A restraint of trade would likely be used to restrain a person who played a key role in the company, as having them working for competitors could be detrimental to the one seeking the restraint.  

What is restraint of trade regarding a contract for the sale of a business?

A common restraint of trade imposed on people is within contract for the sale of businesses. Normally, the clause will restrict the owner of a business from carrying out business of the same kind nearby, or for a period of time. As a business owner, restraints of trade, where valid, can be a useful tool to generate goodwill in your business and foster a loyal customer base without the threat of competition from a former competitor. 

If you are operating under a restraint of trade, you should always be wary of the limits to which you are allowed to operate your business. A lapse in this area could be costly as this may result in legal action in breach of contract against you. If you are considering a contract with a clause like this, you should consider what you are trading in order to get the rest of the benefits included within the contract, and whether it is reasonable. If not, you could negotiate for a reduction in the intensity of the terms offered. 

What are the remedies associated with a clause regarding the breach of restraint period?

Should a breach be triggered involving a restraint of trade clause, there are a number of remedies available to an aggrieved party. If the other party has been acting against the terms of the contract, the court may order an injunction to restrain them. Often, a full injunction will be sought at a full trial, but in the meantime, the aggrieved party will likely seek an interim injunction. This interim injunction may require the contravening party to stop breaching the restraint of trade, or to act in some way as to mitigate any breach suffered by the innocent party. 

You should seek legal advice if you have a contract in front of you which is waiting to be signed, and you are unsure about the terms within it. Legal Kitz is there to help alleviate your legal stresses and assist in interpreting any contract. We offer a FREE 30 minute legal consultation with our trained professionals in order to make sure you are on the right track with your legal matters! Additionally, if your business needs assistance in drafting a contract with a restraint of trade, our Business Kitz business specialists can point you on the right track. Book a call now or purchase our subscription plan which offers 200+ employment templates.

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