Restraint of trade clauses are often found in employment agreements and business sale contracts. RMB Business & Commercial Transactions Division explains.
Restraint of Trade clauses are designed to protect business interests such as client information, intellectual property, employees and trade secrets, by restricting the behavior of previous employees or business owners.
However, the extent to which a business can restrict an employee’s or a former owner’s activities through such a clause is often contentious and can result in disputes.
There are several different types of restraint of trade clauses that relate to the restraint of different activities, including:
Competition
These clauses prohibit employees from working for a competitor or starting a competing business.
Business
These relate to businesses that are sold and will generally prevent the vendor from operating a similar business within a geographically defined area for a period of time.
Poaching employees or clients
These purport to prevent an employee from encouraging employees or clients away from the employer after they leave the company.
Confidentiality
These prevent employees from divulging, using or applying knowledge or information gained during their employment outside of the scope of that employment.
Whether a restraint of trade clause is enforceable depends on the particular facts and circumstances of each case but they are generally unenforceable unless they can be shown to be reasonable. To satisfy a court that the clause is reasonable, a party must establish that it is protecting a legitimate interest and that its reach is reasonably necessary for protecting that interest.
The onus is on the employer/new business owner to prove that the restraint is reasonable to protect legitimate business interests. That is determined by assessing factors such as the duration of the restraint; the geographical area over which it is to operate; activities to be restricted; nature of the business and the characteristics of the former employee/business owner; remuneration and compensation for the restraint; impact on a former employee’s/business owner’s ability to earn a living; and bargaining power between the parties.
A court may “read down” a restraint of trade clause that would otherwise be unenforceable. This means the court may enforce a restraint to a limited extent if enforcing it to the full extent would be unreasonable.
Restraint of trade clauses can impose serious restrictions on your future liberties, particularly your ability to find work, so it is essential that you seek legal advice to ensure that your rights are not being unduly restricted.
RMB can assist in all business and employee Restraint of Trade matters, your first step should be to contact our office to arrange a free consultation. You can contact us by by phone or our 'Ask a Question' tool on our website.