A restraint of trade is defined as a limiting covenant that influences future activities.

These conditions can be found in:

  • Employment contracts;
  • Contractor's agreements;
  • Commercial agreements (i.e. sale of business and franchise).

    • The Courts have a wide discretion to determine the extent of such provisions, and deal with the facts of each individual case. It is also important to seek timeous legal advice as the restraint is judged whether it was reasonable at the time of the agreement.

    General

    The starting point of restraint provisions are that they are void and unenforceable as a matter of public policy. It is not in the interest of the public to deprive a person or entity of his economic potential.

    Any condition that purports to restrain another must in all circumstances be no more than necessary to protect an interest. Many additional factors weigh in on the implementation and severity of limitation clauses including nature of the relationship between the parties, payments to compensate for a restraint and paid goodwill.

    Principles to consider

    The restraint must be more than a mere attempt to prevent competition.

    Parties relying on protection must prove:

  • A legitimate business interest; for example confidential business information that may be used to the detriment of the employer, or personal contact with clients that might be used to lure away customers;
  • Scope of the impediment; even with a clear interest to protect, the restraint must still be reasonable in its application. Key elements include duration of the restraint, geographical area of application and the nature of activities to be controlled.

    • As stated before the Courts deal with restraints on a case by case basis, and the applications are as varied as the disputes.

    Types of clauses

    Limitation clauses are generally classed in three categories:

  • Non-compete provisions that prevent competition with the employer. These conditions are generally difficult to inforce as it is considered unreasonable;
  • Non-solicitation provisions to protect against advances to other employees, suppliers and clients of the employer. Although still regulated these stipulations are more readily shown to protect a legitimate interest and could be considered reasonable. This is further supplemented by an implied duty of fidelity toward the employer;
  • Restraints that seek to stop disclosure of confidential information and trade secrets are more likely to be upheld than general generic limitations. Sensitive material include client lists, business information, plans, sales data and pricing.

    • Conclusion

    The application of restraints are not straight forward and can have severe consequences on future options after an employment or business relation has ended. Identical provisions can have vastly diverse outcomes based on different relationships and industries.

    It is imperative that contracting parties seek independent legal advice at time of the agreement.


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