Contracts relating to employment or the sale of a business

The three requirements of restraint

Examples of this kind of restraint would include a restriction on a sales representative from soliciting the customers of a former employer, or a restriction on the seller of a business from setting up in competition to the buyer. For such restraints to be valid, there are three requirements which must be fulfilled:

  1. There must be a valid interest which the party imposing the restraint is trying to protect;
  2. The restraint must be no more extensive than is reasonable to protect that interest; and
  3. The restraint must not be contrary to the public interest.

Must have a valid interest

Looking at the first of these requirements, an employer will have a legitimate interest in restricting the activities of a departing employee, where that employee has either acquired trade secrets, or has gained influence over the employee’s customers, either because they rely on the employee’s skills and judgment, or because they have dealt exclusively with that employee. As was made clear by the House of Lords in Herbert Morris Ltd v Saxelby, it is not sufficient simply that the employee may compete with the former employer, or use ‘skill and knowledge acquired by the employee in his employer’s business.’

In relation to the sale of a business, the interest which the buyer is trying to protect is likely to be the ‘goodwill’ in the business, that is, the existing trade which has been built up by the seller. The buyer will probably have paid a substantial sum as part of the purchase price for the benefit of taking over the ‘goodwill.’ In that context, the buyer has a legitimate interest in preventing the seller from setting up a business which will attract all the old customers.

The courts have been prepared to recognise that the categories of legitimate interest are not closed. For example in Greig v Insole, which concerned restrictions placed on professional cricketers by the cricketing authorities, Slade J  recognised that there might be a public interest that the game of cricket should be properly organised and administered.

Restraint must be reasonable

The reasonableness or otherwise of the restraint must be looked at in the context of the interest which is being protected. There are three main factors to consider: (1) the geographical area covered; (2) the length of time involved; and (3) the scope of the activities covered.

For example, if a business is sold in one town, a restriction preventing the opening of a similar business anywhere in the country would be unlikely to be regarded as reasonable. In Mason v Provident Clothing Co, a canvasser who had been employed to sell clothes in Islington was restrained from entering into similar business within 25 miles of London.

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For more information on:

  • Public interest
  • Effect of a breach of contract