Contracts in restraint of Trade

A contract in restraint of trade is whereby a person is limited from exercising a lawful trade or business of any kind in a manner he wishes. The law provides that any agreement or contract which contains a provision or covenant whereby a party  is restrained from exercising any lawful profession, trade, business or occupation shall not be void unless the court finds it to be:-

  • Unreasonable
  • Injurious to the public interest
  • Where an employer terminates the services of an employee for contravening the terms of the contract of service.

These contracts mainly arise in two scenarios:-

  1. Bind employees not to take any employment with anyone who is in direct competition with the employer. This clause is often placed as a term for termination and the courts regard such a contract as unfair to the employee who is not placed at an equal position to negotiate the terms.
  2. Bind sellers of a business not to compete with the purchasers. It is usually assumed that the buyer and the seller are on an equal footing to negotiate the terms of the contract.

The courts usually determine whether a restraint is reasonable or not and mostly apply the following test:-

  1. The nature of the party’s business
  2. The position of the party
  3. The area covered by the restraint clause
  4. The duration of the restraint clause
  5. In case of a minor, whether it is for the minor’s benefit.

Example of reasonable restraint

In Trevor Andre v Bashford,  the hairdresser agreed not to engage in hairdressing within three-quarters of a mile radius for a period of six months after leaving employment. This was found reasonable as it went no further to protect the employer’s business.

Example of unreasonable restraint

Mason v Provident Clothing and Supply CO, an employee of a firm of tailors and drapers agreed that he would not become employed in a similar business within three years  and within  twenty miles of London. This was found unreasonable as an employees’ personal skills are their own possession.

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