A restraint of trade is an agreement between employer and employee wherein, upon termination of employment and in order to safeguard the employer from unlawful competition, the employee agrees to a restriction of its trading activities.
An employer’s intention to restrict an employee’s trading activities must be clear and unambiguous, as such the agreement must be voluntary, with an understanding of the repercussions that will exist should the contract be breached.
The ambit, area and period of the restraint must be reasonable, justifiable and cannot be against public policy. In other words: To restrain one in his/her professional capacity is unreasonable. However, to restrain a professional from working for a competitor, or in the same or similar industry as the current employer is reasonable. Further, Where ever the employer conducts its business it is deemed reasonable to prevent the employee from working with a ‘like’ company/competitor in the same geographical area. And, provided the employee is paid during the period of restraint then a year restraint of trade will not be seen as unreasonable.
In deciding on the validity of a restraint the courts must balance the competing interests of the employee’s freedom to earn a living with the employer’s right to protect its proprietary interest. For a restraint to be unenforceable a party must clearly show that the effect of the contract was to cause the sterilization of services without any justification for the protection of the employer’s business interests.
Is the restraint reasonable?
Ask the following questions to find out if your restraint of trade is reasonable:
- Does one party have an interest that deserves protection after termination of the agreement? If so, is that interest threatened by the other party?
- In that case does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive or unproductive?
- Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected?
Where the interest of the party sought to be restrained weighs more heavily than the interest to be protected the restraint is unreasonable consequently unenforceable.
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