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Restraint of trade is a common law doctrine relating to the enforceability of contractual restrictions on freedom to conduct business. In an old leading case of Mitchell v Reynolds (1711) Lord Smith LC said,[1]

"it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice. If the law has regulated or restrained his mode of doing this, the law must be obeyed. But no power short of the general law ought to restrain his free discretion."

A contractual undertaking not to trade is void and unenforceable against the promisor as contrary to the public policy of promoting trade, unless the restraint of trade is reasonable to protect the interest of the purchaser of a business.[2] Restraints of trade can also appear in post-termination restrictive covenants in employment contracts.

History[edit]

Chief Justice Coke, 17th century English jurist

Legal contract between a buyer and a seller of a business, or between an employer and employee, that prevents the seller or employee from engaging in a similar business within a specified geographical area and within a specified period.[citation needed] It intends to protect trade secrets or proprietary information but is enforceable only if it is reasonable with reference to the party against whom it is made, and is not contrary to the public policy.

The restraint of trade doctrine is based on the two concepts of prohibiting agreements that run counter to public policy, unless the reasonableness of an agreement could be shown. A restraint of trade is simply some kind of agreed provision that is designed to restrain another's trade. For example, in Nordenfelt v Maxim, Nordenfelt Guns and Ammunition Co[2] a Swedish arms inventor promised on sale of his business to an American gun maker that he "would not make guns or ammunition anywhere in the world, and would not compete with Maxim in any way."

To be a valid restraint of trade in the first place, both parties must have provided valuable consideration for their agreement to be enforceable. In Dyer's Case[3] a dyer had given a bond not to exercise his trade in the same town as the plaintiff for six months but the plaintiff had promised nothing in return. On hearing the plaintiff's attempt to enforce this restraint, Hull J exclaimed,

"per Dieu, if the plaintiff were here, he should go to prison till he had paid a fine to the King."

The common law evolved with changing business conditions. So in the early 17th century case of Rogers v Parry[4] it was held that a promise by a joiner not to trade from his house for 21 years was enforceable against him since the time and place was certain. It was also held (by Chief Justice Coke) that a man cannot bind himself to not use his trade generally.

This was followed in Broad v Jolyffe[5] and Mitchell v Reynolds[1] where Lord Macclesfield asked, "What does it signify to a tradesman in London what another does in Newcastle?" In times of such slow communications and commerce around the country it seemed axiomatic that a general restraint served no legitimate purpose for one's business and ought to be void. But already in 1880 in Roussillon v Roussillon[6] Lord Justice Fry stated that a restraint unlimited in space need not be void, since the real question was whether it went further than necessary for the promisee's protection. So in the Nordenfelt[2] case Lord Macnaghten ruled that while one could validly promise to "not make guns or ammunition anywhere in the world" it was an unreasonable restraint to "not compete with Maxim in any way." This approach in England was confirmed by the House of Lords in Mason v The Provident Supply and Clothing Co.[7]

Restraining workers[edit]

Under English law, restraining clauses in employment contracts are enforceable if[citation needed]:

  • There is a legitimate interest which needs to be protected. Examples of such interests include business connections and business secrets.
  • The restraint is reasonable, i.e. sufficiently protects the interest and goes no further.

Generally, if a restraining clause is found to be unreasonable, then it will be void. In certain circumstances though the court may uphold it either by construing ambiguities or by severance. Severance consists of the application of what is known as the "blue pencil test"; if individual words which make the clause excessively wide are able to be crossed out and the clause still makes grammatical sense, without altering the nature of the obligations, then the courts may be willing to sever the illegal aspects of the clause and enforce the remainder.

Contemporary application[edit]

Though the restraint of trade doctrine is still valid, the current use has been limited by modern and economically oriented statutes of competition law in most countries.

Notes[edit]

  1. ^ a b Mitchell v Reynolds (1711) 1 P Wms 181
  2. ^ a b c Nordenfelt v Maxim, Nordenfelt Guns and Ammunition Co [1894] AC 535
  3. ^ (1414) 2 Hen. 5, 5 Pl. 26
  4. ^ Rogers v Parry (1613) 2 Bulstr 136
  5. ^ Broad v Jolyffe (1620) Cro Jac 596
  6. ^ Roussillon v Roussillon (1880) 14 Ch.D. 351
  7. ^ Mason v The Provident Supply and Clothing Co. [1913] AC 724

References[edit]

  • Wilberforce, Richard, Alan Campbell and Neil Elles (1966) The Law of Restrictive Practices and Monopolies, 2nd edition, London: Sweet and Maxwell LCCN 66-70116

External links[edit]


Original courtesy of Wikipedia: http://en.wikipedia.org/wiki/Restraint_of_trade — Please support Wikipedia.
This page uses Creative Commons Licensed content from Wikipedia. A portion of the proceeds from advertising on Digplanet goes to supporting Wikipedia.

204 news items

 
Lexology (registration)
Wed, 23 Jul 2014 08:11:15 -0700

Restraint of trade clauses are not uncommon within commercial contracts. They operate to prevent one party from competing with the other during and after the agreement. They may arise in the context of placing restrictions on employment, restrictions ...
 
Business First of Buffalo
Mon, 14 Jul 2014 07:58:44 -0700

The state has reached a settlement with a waste-hauling firm that was accused of unlawfully restraining trade in the Southern Tier and other parts of the state. The settlement with Casella Waste Systems Inc. was announced today by New York Attorney ...
 
National Business Review (subscription)
Wed, 16 Jul 2014 14:09:26 -0700

Bencho - a $5 million company which distributes low price sunglasses through service stations and convenience stores – had obtained an indefinite restraint of trade on former shareholder Chris Bissiotis. Mr Bissiotis, now based in Australia, had ...
 
Legalbrief (subscription)
Sun, 13 Jul 2014 23:45:00 -0700

Former Ster-Kinekor employee Andries Basson has been interdicted by the Gauteng High Court (Pretoria) from taking up employment with rival Nu Metro Cinemas for a year, because he signed a restraint of trade agreement, says a Weekend Argus report.

SmartCompany.com.au

SmartCompany.com.au
Mon, 28 Jul 2014 17:11:15 -0700

Restraint of trade provisions have also been targeted, potentially allowing ex-franchisees the freedom to continue operating as independents after the end of their franchise agreement if they are willing to renew but are not renewed by their franchisor.

The Federalist

The Federalist
Mon, 28 Jul 2014 04:48:45 -0700

This began with the antitrust laws, which banned “restraint of trade” without defining what that meant, leaving it to the courts to make the law as they went along—or, more often, leaving it to the arbitrary prosecutorial discretion of the Department ...
 
Lexology (registration)
Tue, 22 Jul 2014 02:11:15 -0700

Particularly in franchise and sub-franchise scenarios, it is essential that parties carefully review restraint of trade clauses to determine what rights and responsibilities they have. Even a head-franchisor, which might assume some degree of ...
 
Lexology (registration)
Sun, 27 Jul 2014 12:52:30 -0700

The questions before the Full Court included whether the relevant clauses of the Subleases amounted to a restraint of trade; were unreasonable; and whether s4(3) of the Restraints of Trade Act 1976 (NSW) (Restraints Act) could (or should) save any part ...
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