Restraint of Trade

Restraint of Trade Doctrine

The common law renders void, a contract which provides for an unreasonable restraint of trade. Restraint of trade refers to a purported contractual provision, which restricts a person’s ability to carry out his trade, profession or business with others.  The restriction my restrict a person from setting up business in a particular field, within a certain geographical area for a period.

Restraint of trade clauses are commonly found in employment contracts and in contracts for the sale of a business.  The practical effect of a restraint of trade covenant is to restrain competition.  However, the restraint of competition is not a legitimate purpose and is invalid under common law and competition legislation.

There may be restrictions on soliciting former customers or poaching employee. There may be obligations to keep certain information a secret.  There may be an outright prohibition against setting up in a particular area, within a particular time in competition with the other party.  Each of these restrictions is potentially subject to the restraint of trade doctrine.

In the last twenty years, the restraint of trade doctrine has been supplemented by competition law.  Many of the transactions traditionally subject to the restraint of trade principles, would be too minor or local to cause a significant risk of competition law breach. However, competition may apply in much the same manner as the restraint of trade doctrine.

Potential  Validity

Restraint of trade clauses may be valid where they protect a legitimate interest of a party such as an employer or the buyer of a business, and go no further than reasonably necessary to meet this legitimate interest. This basic principle is that a restraint of trade is in itself, contrary to public policy and void.

Contracts providing for such restraints are therefore potentially void, unless justifiable with reference to a legitimate interest. If there is a sufficient justification and the restriction is reasonable to meet it, with reference to the interest of the parties, then provided the restriction is framed and tailored so as to afford no more protection that reasonably necessary while not injuring the public, it is potentially valid.

The key issue is the reasonableness of the restriction in the context of the interest of the protected party. Greater latitude applies in the case of the sale of a business than in an employer-employee relationship.  In the former case, the seller will have received money for the goodwill so the buyer has a very legitimate interest in protecting that goodwill.  It is common that the seller of a business is not permitted to compete for a period, in the same field or trade within a certain geographical area.

Validity Factors

The validity of restrictions on sellers of business will depend on the nature of the trade.  In some cases, a worldwide restriction may be appropriate where the market is worldwide.  In other cases, the restriction must be more local and must be tailored to the legitimate interest concerned.

In the case of an employer-employee relationship, the employer’s legitimate interests are limited to protecting to what is recognised as his property.  This would comprise trade secrets and may include a certain confidential information.  See the separate sections on intellectual property and employment in relation to what is capable of protection.

There was a traditional further requirement that the agreement must be consistent with the interests of the public. Under this particular element, a restraint which would be otherwise reasonable, may be unreasonable as being contrary to the public interest.

The burden of proving the reasonableness of the restraint, rests on the person asserting it.  The court will look at the substance rather than the form of the restraint. It will look at the actual circumstance in which it operates.  Each case must be considered in the light of its own circumstances.

Scope of Doctrine

The class of cases to which the doctrine applies, are not closed.  In modern times, the courts have countenanced the possibility that the doctrine might be applicable to joint ventures and similar arrangements.  Competition law may to come to regulate such agreements  exclusively, if courts interpret statutory completion law as an exclusive regulatory framework.

The restraint of trade doctrine is not limited contracts for employment and the sale of businesses.  It may apply to any contracts or arrangements by which a person is restrained in his freedom to exercise his trade or employment.  The doctrine applies to rules of society, trade bodies and trade union.

The restraint of competition in itself is not a legitimate interest for protection.  There must be a separate legitimate interest, which is protected.  Provided such a legitimate interest exists, the fact that the restriction incidentally restraints trade is not objectionable.

It appears that competition law and the restraint of trade doctrine may operate side by side, covering the same grounds. The Competition Act renders void agreements and arrangements between businesses, which restrict trade or competition, unless there is a legitimate interest.

The courts may find that an apparent restraint on competition,  is not in fact a restriction on competition at all, because of how it operates in the particular market. The Competition Act also provides for potential justifications, where there is a restriction on competition, which is justifiable for a legitimate objective.

Employer’s Legitimate Interests

In the context of employment, the employer has a legitimate interest in protecting trade secrets and  certain other confidential information, which falls short of being a trade secrets.This may, in some cases, include customers list.  He also has an interest in the employee’s obligations of good faith and largely in the course of employment.

Reasonableness is gauged by reference to the employer’s legitimate interest.  In most cases, the reasonableness as between the parties is the exclusive ground.  Exceptionally, the  public interest will be a factor, such as  where a particular restriction is critical to an industry or national interest.

See the separate sections in relation to employee’s trade secrets and trade connection. Trade secrets need not be complex.  They must, however, reflect a certain investment on the part of the employer, which justifies they have been treated as being  the nature of property.

The employer may  not restrain the employee from exercising the skills of his trade or profession. The distinction may not be easy to draw.

Many cases arise in the context of an application for injunction. The question of the grant of the injunction turns principally on the so called balance of convenience and the possibility of irreparable damage, rather than the merits of the abstract law.

Where the information is not a specific trade secret, it may be restrained if it is derived from a breach of the employee’s implied duty of loyalty and fidelity to the employer.  These cases typically involve copying of lists and other sensitive documents, while the employment relationship subsisted.

Where the confidential information is not a trade secret and does not fall into the above categories, then, it appears that even an express covenant will not protect it.

The employer has a legitimate interest in his trade connection. However, an employee may not be restrained from competing.  The employer may be able to protect against the employee  competing with him, to the extent that it is a by-product of the protection of some other legitimate interest or is traced to breach of duty while an employee.An injunction may not necessarily be granted and damages may be appropriate.

If the clause is too wide, it is invalidated as an unlawful restraint of trade. The customer connection has been protected  in some cases for a certain period, in order to prevent unfair practice.

Tailored to Interest

Restraints imposed on the sale of a business must be tailored to protect the goodwill.  They commonly restrain competition and prohibit the seller from soliciting employees and customers within a certain time or certain radius.  They must go no further than reasonably necessary, in order to protect the interest.

The restraint should be limited to the seller of the business of the strength. Restraints on  employees or other  participants in the business  are less likely to be upheld.

Common place exclusive dealing arrangements are wholly outside the doctrine.  The rules of a co-op are subject to the doctrine.  In some cases, the public interest will be emphasised as a legitimate factor in such cases.

Solus Agreements

A number of Irish cases prior to the Competition Act dealt with solus agreements between oil companies and garages. They appear to remain  subject to the doctrine, even after the Competition Act.

The Courts who prepared to uphold such agreements for a certain periods, as reasonable in the circumstance. The duration of the tie is an important factor.

It has been held in England that  the doctrine does not apply at all where at the time of contracting, the trader did not enjoy freedom to carry on that trade at all.

Exclusive dealing arrangements appear to be outside the common law restraint of trade doctrine. So too are restrictions in relation to the use of land.  Covenant precluding the use of property for particular purpose, have been held by the Supreme Court to be outside the doctrine.

Property

The Courts have not generally extended the doctrine to the grant of a lease,  where the lessee has no freedom to trade at that particular location at the outset.  The Courts have distinguished between one who gives up a freedom which he has and one who buys or comes to a location subject to restrictions which he agrees to or knows to apply under the existing lease.

The restraint of doctrine applies where the restrictions go beyond the use of the property and a wider transaction or arrangements which applies significant restrictions.  A distribution agreement with restrictive terms, may in principle be subject to the doctrine Arrangements between motor garages and oil companies and motor garages have been long held to be subject to the doctrine.