Restraint of Trade

Contracts that impose restraints on trade are generally void, as they conflict with the fundamental principle of free trade and labour. However, such restraints may be upheld if they protect a legitimate interest, are reasonable between the parties, and do not go further than necessary. Common examples include clauses prohibiting competition after the sale of a business or restrictions in employment contracts to protect confidential information. Such restrictions must be narrowly tailored and justifiable.

Historically, all restraints were void to prevent monopolies, but courts later recognised legitimate interests, such as protecting goodwill or trade secrets, provided the restraint was limited in duration and scope. Restraints that only suppress competition without protecting a legitimate interest are not enforceable.

Reasonableness involves two aspects: fairness between the parties and public interest considerations. Greater latitude is allowed for business sales than for employment agreements. Restraints contrary to public interest—such as those reducing competition or limiting market supply—may also be invalid.

Modern competition law complements the restraint of trade doctrine, voiding agreements that restrict competition unless justified. The courts enforce reasonable restraints through injunctions or damages, with the burden of proof on the party seeking enforcement.

Severance may preserve lawful parts of an agreement while voiding unreasonable clauses. However, courts will not rewrite contracts; only clauses that can sensibly operate without the offending terms will be upheld. Where severance is impractical, the entire clause, or in some cases the agreement, may be invalidated.

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