What are restraint of trade clauses and will they ever be legal?

Restraint of trade

What is meant by restraint of trade?

In the United Kingdom restraints of trade are restrictions that have been imposed on free trade or limitations on the individual liberty of traders to buy and sell freely.

How are restraint of trade clauses imposed on parties?

Restraint of trade clauses are usually contractual clauses that go too far in limiting competition on the market. Under the proper functioning of competition law it is the policy of the law to ensure that all traders are free to select with whom they contract.

It follows that any clauses which seek to restrain this power and impede selection should be void on the grounds of public policy unless it is reasonable to do so and it is in the public interest.

When will restraint of trade clauses come into play?

Most restraint of trade clauses are contractual provisions which in most cases usually come in the form of restrictive covenants placed on a party which will be deemed to go too far in protecting the interests of one of the parties.

An example of this is when a business is purchased; the purchaser will often wish to prevent the vendor entering the same type of business in the same geographical location for a certain period of time. 

When will restraint of trade clauses be allowed?

The general rule regarding restraint of trade clauses is that they are unenforceable at common law. However, a Court may decide to enforce such clauses if they are considered to be reasonable with the reference to the interests of both of the parties and do not breach the public interest in free trade.

When will a restraint of trade be regarded as reasonable and not to breach the public interest?

When deciding as to whether restraint of trade clauses in a contract are reasonable and not in breach of the public interest in free trade the court will take into consideration a number of factors.

Accordingly the clauses in the contract must be no more than is necessary to protect the legitimate interests of the party relying upon it. No party is allowed simply to restrict competition because they may wish to they will need to show that it is required to protect their legitimate interests.

Issues of contractual consideration will also be looked at by the court – for example the court will look into whether the party that has been restrained has been paid enough for that restraint.

The claimant will also need to prove on the balance of probabilities that the clause is protecting their legitimate interests.

Are there any other factors which the court is likely to take into consideration?

The court is also likely to take into consideration the following other factors when deciding whether a contractual clause is a restraint of trade:

  • Industry practice
  • Other similar contracts within the same industry

What is an example of a restraint of trade clause being reasonable and necessary to protect the legitimate interests of the claimant?

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For more information on:

  • What factors will be taken into consideration in this example?
  • Can restraint of trade clauses also operate in the employment industry?
  • When will these kinds of restraint of trade clauses be deemed legal?
  • What will be deemed to be legitimate interests in this context?
  • What happens once a legitimate interest has been identified?