Contracts in restraint of trade

Question 1

Explain what is Contracts in Restraint of Trade?

Answer 1

These are contracts that restrain a person from carrying on a lawful profession, trade, or business.

As the contracts have an impact on the economic interests of society and are hence contrary to public policy, they are prima facie (on the surface) illegal and void. Such agreements will only be enforced if they can be shown to be reasonable as between the parties and in the public interest.

Where the offending clause is only one of many clauses in a contract, the court may cancel the illegal clause and enforce the valid clauses.

Question 2

What are the 4 main types of restraints in contracts?

Answer 2

1. Contracts of employment sometimes provide that the employee, after leaving his present employment, may not compete against his present employer either by setting up a similar business or his own or by working for a rival firm.
2. On the sale of a business, the buyer will often require the seller to promise that, in future, he will not carry on a similar business in competition with the buyer. This is to prevent the seller from setting up a business nearby and attracting all his old customers away from the buyer
3. Suppliers of goods and services sometimes agree between themselves to fix prices, restrict output, regulate the methods of supply or otherwise, influence the market for their product.
4. Retailers sometimes make “solus” or similar agreements with suppliers under which the retailer promises to sell only that supplier’s brand of goods. This is to prevent the retailer from selling the products of the supplier’s competitor. i.e agreements between petrol operators and petrol companies.

Question 3

What are the 4 factors that shows whether the restraint is reasonable?

Answer 3

1. whether the person for whose benefit for the restriction was imposed had any legitimate interest in imposing it, (i.e whether he owns or has developed anything valuable such as trade secrets or database of customers’ confidential information, which deserves protection);
2. the nature of the restraint;
3. the geographical area of operation of the restraint; and
4. the duration that the restraint applies

Question 4

Additional information

Answer 4

The restraint as a whole must be no more than what is reasonably necessary to protect that particular interestl This should be considered in the wider context of what is in the public interest e.g freedom of trade, etc. Some restraints may have a wider economic effect, for example, a perpetual restraint that covers an entire country.

Generally, courts have not been sympathetic to restraints on employment, which attempt to restrict the right of a person to earn his living where, when and with whom he likes. Furthermore, the worker may have been “persuaded” to agree to the restraint because the employer was in a stronger bargaining position.