A restraint of trade clause is a clause which is included in an agreement typically to stop someone from competing or using confidential information.
When is a Restraint of Trade clause used?
Restraint of trade clauses are used in various situations: in the case of a franchise relationship, the exiting franchisee may be restrained from competing with the franchisor for the purpose of protecting the franchisor’s goodwill, using the confidential information, trade secrets and trade connections of the franchisor.
In the case of the sale of a business, the vendor may be restrained from competing with the purchaser for the purpose of protecting the goodwill acquired by the purchaser. In the case of an employment relationship, an employee may be restrained from using the confidential information, trade secrets and trade connections of the employer.
When will a Restraint of Trade clause be enforced by a Court?
A Court will consider how reasonable the restraint is (does it protect only what it is attempting to protect). If a restraint of trade clause is drafted too widely, or if there is another way to protect the interests of the party seeking to enforce the restraint of trade clause, the clause may not be enforceable.
The interest of the parties to the agreement, and the interest of the public.
Given the factors set out above a restraint of trade clause must be carefully drafted taking into account the specific circumstances of the case