Restraint of trade
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Restraint of trade is a restriction on a person's freedom to conduct business in a specified or unspecified location for a specified or unspecified length of time. Such restrictions are normally enacted by contracts. Generally however, such contracts are void on the ground of illegality, and cannot be enforceable unless they are reasonable in the interests of both contracting parties and of the public at large (Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535). Contracts between employer and employee and contracts for the sale of businesses which include terms which would restrict the free conduct of business are subject to this rule.
Employment contracts which include restraining clauses, are generally held to fulfill the requirements in Nordenfelt providing that:
- There is an interest which needs to be protected. Examples of such interests include business connections and business secrets.
- The restraint is reasonable, i.e. sufficiently protects the interest and goes no further.
- The restraint is not contrary to the public interest (e.g. prevents a physician working in an area where there is a shortage of physicians).
Generally, if a restraining clause is found to be unreasonable, then it will be void. In certain circumstances though the court may uphold it either by construing ambiguities or by severance. Severance consists of the application of what is known as the "blue pencil test"; if individual words which make the clause excessively wide are able to be crossed out and the clause still makes grammatical sense, without altering the nature of the obligations, then the courts may be willing to sever the illegal aspects of the clause and enforce the remainder.
[edit] External links
- Practical law: Restraint of trade and business secrets
- Legal advisor: How employers protect their business
OPINION OF LORD EASSIE in the cause PHOENIX CONSULTANCY (SCOTLAND) LIMITED v. THE ROYAL BANK OF SCOTLAND PLC, [2003 CA248/01 OPINION OF LORD McEWAN in the cause DAVID FRAPE v. EMRECO INTERNATIONAL LIMITED, [2001]
