The Restraint on Restraints

No this is not an article about sadomasochism (try not to look so disappointed!) but contract law.

Legal theorists like to think that a party is free to contract with another party. The common law however places a number of restrictions on contracts. This does not just include contracts to carry out illegal acts, although these do exist (for example a court would never enforce a contract with a hitman to carry out at someone’s murder).

A contract also may be void or not enforced by a court if it infringes some area of public policy. Some contracts in this category are quite esoteric, for example contracts involving trading with the enemy in times of war, contracts prejudicial to the status of marriage, and contracts promoting sexual immorality. With any luck you will never come across a situation where any of these will be relevant.

What is most likely, and indeed most people will come across such a contract, is one which includes a restraint of trade. Quite often contracts of employment will include clauses which seek to Clauses such as these are also common in sale of business contracts.

Although such clauses are very common what is perhaps less well known is that they are presumed to be void. This is because, as a matter of public policy, the Courts have taken a very dim view of any agreement which purports to restrict a person from freely exercising their trade, business or profession.

To be enforceable a restraint must be reasonable in two ways. Firstly, it must be reasonable as between the parties, meaning that it must be no wider than is reasonably necessary to protect the person for whose benefit it is imposed. Secondly, the restraint must be reasonable in the interest of the public, that is it must be of a nature that is not contrary to public interest.

Reasonableness is generally assessed in terms of duration, geographic location, and activities.

Someone who works as a butcher, or selling a butcher’s business, would not be able to enforce a restraint which prohibits an employee or business owner from working in or owning any retail store across New South Wales for five years. Such a term would clearly be unreasonable and unenforceable.

The test as regards to public policy takes into account similar considerations. There is also a stronger focus on the respective bargaining power of the parties. For example, a young songwriter’s contract with a music company provided that he would provide his services exclusively to the company for a period of five years.  The Court found that the contract was unenforceable. It did not meet the public policy test of fairness because the restrictions were not reasonably necessary for the protection of the legitimate interests of the company or commensurate with the benefits secured to the writer.

So, what is this all mean? No one is suggesting that employee or businesses should be able to use confidential information of a company to their own benefit, and to that company’s detriment. The law however does want to make it possible for a person or business to use their own skills in trade freely. When considering such a term it is important to have clearly in mind what is trying to be protected, and what is the minimum necessary to give the protection sought. Any more than the minimum runs the risk of making the clause unenforceable.

If you are in any doubt about the enforceability of such a clause, regardless of which side of the transaction you are on, it is best to seek legal advice.