Restraint Issues
Restraint of trade clauses are frequently included in employment contracts, contracts for the sale of a business, and other commercial agreements. These clauses are subject to the doctrine of restraint of trade, which renders them void unless they protect a legitimate interest and are reasonable in scope, duration, and geographic reach. This doctrine balances an individual’s freedom to trade against the need to protect proprietary or business interests.
In employment contracts, the doctrine is applied more strictly than in business sale agreements because employees are seen as more vulnerable and lack the financial benefit typically received by sellers of businesses. Employers can impose restrictions to protect legitimate interests such as trade secrets, confidential information, customer connections, and goodwill, but not to simply restrain competition.
Legitimate restrictions include non-compete clauses, non-solicitation clauses (preventing poaching of clients or employees), and confidentiality obligations. These must be narrowly tailored to the specific interest being protected and reasonable in scope. Trade secrets and highly sensitive confidential information receive greater protection than general knowledge or skills acquired by an employee.
In the sale of a business, broader restraints may be justifiable to protect goodwill. Such restraints often limit competition for a defined time and area, with global restrictions being permissible where the business operates internationally.
The doctrine extends to partnership agreements, exclusive dealing arrangements, music and sports contracts, and the rules of trade associations or sporting bodies. It generally does not apply to restrictive covenants related to land use, as such restrictions are tied to property ownership rather than trade.
Courts assess reasonableness by examining the legitimate interests protected, the public interest, and the proportionality of the restraint. Unreasonable clauses may be severed, leaving the remainder enforceable, provided the contract remains coherent and functional. However, courts avoid rewriting agreements to enforce overly broad or unreasonable clauses. Where applicable, competition law operates alongside the restraint of trade doctrine to address broader anti-competitive practices.
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