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Restraint of trade refers to any action or agreement that restricts free market competition. These clauses are often included in employment contracts, business agreements, and mergers and acquisitions. These clauses aim to limit competition by restricting individual, entities or related entities from engaging in a similar business or professional activities. Their primary aim is to protect business interests, such as confidential information, client relationships, and intellectual property. However, the effectiveness of these clauses depends on numerous factors, simply including them in the agreement will not suffice.
This article unpacks the concept of restraint of trade, its reasonableness, enforceability and legal effectiveness, practical consideration and importance of lawyers in drafting this clause.

Reasonableness, Enforceability & Legal Effectiveness

The restraint of trade clause in business context, offers protection to a buyer who has purchased a business, and it prevents the seller from directly competing against the buyer. However, restraint of trade clause must be reasonable to protect legitimate business interests. Those restraint of trade clauses which are designed merely to prevent competition are generally considered unreasonable. For instance, it is deemed unreasonable if a restraint of trade clause prohibits a non-compete agreement to prevents a former business owner from founding any new businesses in the same field anywhere in the country or even globally and forever. Reasonableness is a crucial factor in determining enforceability and it can vary significantly by specific areas.

The clarity and specificity of the restraint of trade clause can impact its enforceability. A well-drafted restraint of trade clause that clearly defines the scope, duration, and genuine intent of business is more likely to be enforced than a vague or ambiguous one. If there is no genuine interest being protected or the clause is unreasonably wide, it is highly likely that it is not enforceable. Each business agreement is so specific to its own terms and conditions that for a restraint to be reasonable, there must be a genuine interest of the business requiring such protection. The effectiveness of restraint of trade can be assessed from multiple perspectives. An effective restraint of trade clause ensures that the agreements are enforceable only when they protect legitimate business interests without unnecessarily restricting competition or individual freedom to work.
New Zealand courts general approach to assess the restraint of trade clauses is reasonableness, which is based on several factors like duration, length of the restriction and geographical boundaries. A clause extending beyond what is necessary to protect legitimate business interests may not be enforceable.

The courts focus on the geographical area covered by the restraint that should not be broader than necessary. Another factor which court takes into consideration is scope of activities. The type of activities that needs to be restricted must be limited to what is essential for protecting business interests. Overly broad restrictions that prevent a party from engaging in any similar business may be unenforceable.
The legal effectiveness of restraint of trade clause relies on balancing the protection of business interests, fostering competitive markets, safeguarding consumer rights, and ensuring fair employment practices.

Practical Considerations

In practice, the buyer of a business will want assurances that the seller won’t undermine them. This might be done by directly competing with the buyer. This is typically a topic of discussion between the buyer and the seller when purchasing a business. To avoid such situations businesses, need to carefully draft its restraint of trade clauses to ensure they are reasonable and enforceable. This includes tailoring and drafting clauses that can be used to protect specific business interests and avoid overly broad restrictions.

Businesses need professional advice from a lawyer in writing restraint of trade clause accurately while considering and negotiating its implications during contract negotiations to ensure that they are fair and reasonably enforceable.

Lawyers Role

Lawyers play a crucial role in drafting, reviewing, and enforcing restraint of trade clauses in accordance with the current legal standard and requirements. Their expertise ensures that these clauses are legally binding, reasonable and enforceable to protect business interests while complying with legal and ethical standards. They ensure the language of the clauses in the business agreement is simple and clear reducing the potential risks for any disputes and misunderstandings that can arise between the parties in future.
In business transactions, such as mergers or acquisitions, lawyers negotiate restraint of trade clauses to ensure they adequately protect the client’s interests. Lawyers provide ongoing advice to businesses on how to comply with restraint of trade clause by helping them implement policies and practices that align with legal requirements.

Conclusion

The restraint of trade clause is most common in the buying and selling of business and less often in employment agreements. The effectiveness of restraint of trade clauses relies on their reasonableness, the protection of legitimate business interests such as trade secrets, customer relationships and proprietary information, adherence to public policy, and the clarity of their terms. Businesses must navigate legal and practical challenges to draft enforceable clauses that balances protection of business interests with respecting individual freedoms and competitive practices. Understanding and addressing these factors can enhance the effectiveness of restraint of trade provisions and ensure their legal enforceability.
Restraint of trade is a complex area of law that seeks to balance between individual and business freedoms with the need for a competitive market. While certain restraints are necessary to protect legitimate business interests, they must not be overly restrictive to the public. Regular reviews and updates of these clauses, along with clear communication and legal compliance, can help achieve this balance effectively.

Contact Hamertons Lawyers Ltd today.