What?
A clause available for use in corporate or commercial contracts, including:
– Sale of business
– Employment contracts
– Exclusive supply contracts
– Franchise agreements
Why?
It protects business interests by limiting competition, through restricting the freedom of a business or individual to pursue their trade for a finite period.
How?
Restraint of trade clauses are void and unenforceable unless:
– They are designed to protect a legitimate business interest
– They are no wider than reasonably necessary to protect that interest
– They are not contrary to the public interest
These three principles must therefore be fulfilled in order to successfully use a restraint of trade clause in a contract.
When?
Let’s take the following example: the sale of a business, the contract for which would take the form of an asset or share sale agreement.
Typical restraint of trade clauses in sale agreements would seek to prevent the sellers from exercising certain functions post-completion. Examples include:
– Soliciting existing customers or suppliers of a business for a specified period
– Soliciting and employing existing employees of the business for a specified period
– Competing generally with the business for a specified period within a specified territory
When considering whether a restraint of trade clause is enforceable, the courts will assess if the restraints are a reasonable protection of a legitimate business interest. As a result, they should be tightly drafted – providing sufficient balance for both the buyer and the seller – and ultimately aim to achieve a commercial objective. Generally, it is suggested that the buyer should not focus on setting the bar too high as they may struggle to justify their choices if questioned.
It is important to remember a restraint of trade clause which fits one transaction will not necessarily be appropriate for another – each transaction and contract is different and needs specific drafting. Particular circumstances may apply to each business sale, for example:
– Does the seller have a parent company or a subsidiary? If so, will the restraint extend to those connected companies?
– Does the restraint regarding customers include prospective customers in addition to current customers?
– What are the geographical areas of trade? If the target business trades nationally, the buyer may want to extend the restricted territory to the whole of the United Kingdom – in reality, is this going to be considered reasonable for the seller?
As you may see from this brief snapshot, there is a lot to take into account. If there’s one lesion to learn now – make sure you get it right at the drafting stage so, if necessary, it is enforceable further down the line.
If you want any assistance in drafting restraint of trade provisions or require advice on whether your previously-drafted clauses are valid, please get in touch with our Corporate team – they’ve got your BACK.