Restraint clauses: what they are and what to look out for

Introduction

Restraint of trade clauses can play a vital role in protecting your business. This is especially important in an industry like the hire and rental industry, where employees come and go, and hurdles to entry aren’t particularly high.

But a restraint will only protect your business if it is valid and enforceable.

What are restraint clauses?

In essence, a restraint involves a party promising not to engage in certain activity, such as poaching customers or competing more generally.

Restraints can be found in various contexts, such as in:

• employment contracts;

• consultancy agreements;

• business sale or share sale agreements;

• franchise agreements; and

• shareholders agreements.

As such, individuals or businesses may be subject to multiple restraints at any one time.

The court’s approach to restraint clauses

While restraint clauses can be a useful tool to protect business interests, they may not be enforceable in certain circumstances. Very generally speaking, the Courts consider restraints to be void as the principle behind restraints is contrary to the public policy position that everybody should have the right to earn a living to feed themselves and their families.

The Courts do however recognise that restraints are needed in certain circumstances. In determining whether to enforce a restraint, the Courts normally ask two questions:

• Is there a legitimate interest? and

• Is the restraint reasonably necessary in order to protect that legitimate interest?

What is a legitimate interest?

For the purposes of interpretation, the Courts need to be able to identify a specific interest that needs protection. Typical examples of legitimate interests include trade secrets, confidential information and the goodwill of a business. A general interest, such as an interest in preventing a former employee from competing or using their knowledge, will not be considered a legitimate interest.

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