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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.
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334 news items

 
National Business Review (subscription)
Mon, 04 Aug 2014 18:34:24 -0700

A husband and wife battle over an $8 million restraint of trade payout has made its way to this nation's top court. In a brief Supreme Court judgment released today, Chief Justice Sian Elias, Justice Susan Glazebrook and Justice Terence Arnold granted ...
 
Lexology (registration)
Fri, 22 Aug 2014 03:41:15 -0700

An agreement in restraint of trade has been identified as one in which a party agrees with any other party to restrict his liberty in the future to carry on trade, business or profession, with other persons who are not parties to the contract in such a ...
 
Lexology (registration)
Fri, 29 Aug 2014 18:07:30 -0700

Both parties agreed that if read alone, this sentence of the restriction would be unenforceable as an unreasonable restraint of trade. An additional sentence added to the end of the covenant, provided that the restriction would only operate insofar as ...

High Point Enterprise

High Point Enterprise
Fri, 29 Aug 2014 15:42:36 -0700

The Supreme Court, in a 7-2 ruling, found that the NCAA violated antitrust and restraint of trade statutes by curtailing the ability of universities and conferences to have their teams appear on TV. The case, decided during the 1984 term of the Supreme ...

Financial News

GlobalPost
Tue, 26 Aug 2014 11:33:45 -0700

The restrictions are "contrary to public policy and in restraint of trade, and unenforceable", Rokos said. He also asked the court to rule that Brevan Howard should continue to pay him a share of the firm's profits until 2018. The firm, meanwhile, has ...

Crunch Time News

Washington Post
Mon, 18 Aug 2014 14:53:46 -0700

“The cap is inconsistent with a judicial decision that the restraint (of trade) is unreasonable,” said Robert McTamaney, an antitrust lawyer with the firm of Carter, Ledyard & Milburn. “If the restraint is unreasonable out it goes, there's no partial ...
 
VIN News Service
Mon, 25 Aug 2014 14:22:30 -0700

“We can impinge upon restraint of trade, and I'm not going to allow for that.” With no more discussion, 91 percent of the House voted for the resolution's passage. Though the resolution specifies veterinary medicine, Lutschaunig suggested that the AVMA ...
 
High Plains Journal
Fri, 15 Aug 2014 07:37:30 -0700

If history bears out, based on past embargoes, artificial restraint of trade will be short-lived. The ability of channeling money and goods into a market will be quickly exploited by enterprising companies and nations. The long-term damage will be on ...
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