Restraint of Trade and Conflict of Interest Clauses

 

Restraint of Trade Clauses

There is a legal assumption that a restraint of trade is unenforceable unless the employer can prove they have a legitimate proprietary interest and that the restraint of trade is reasonable with regard to the circumstances. This typically requires the employer to establish a link between their proprietary interest and the duties and responsibilities of the employee who deals with those interests and the risk of breach. If the employer has proven these two elements, the burden then falls to the employee to show that the restraint is contrary to their personal interest and the general public interest.

The definition of proprietary interest includes three main categories: trade or customer connections, the stability of the employer’s workforce, and trade secrets.

When considering whether a restraint of trade is reasonable, the Court will consider the context of the whole of the agreement between the parties and against the background of the circumstances in which the contract was entered into. In general, a restraint of trade will be reasonable where it grants adequate, but no more than adequate, protection for an employer.

Reasonableness – Duration and Geographical Location

When determining reasonableness, the Court will additionally consider how long the restraint of trade lasts for. When considering the validity of the restraint’s duration, the Court will look at the facts and circumstances of the relevant company’s business, the nature of the interest to be protected, and the potential effect of an ex-employee opening their own business. Industry practice will also be taken into account. In general, the Court will rarely find a restraint of trade clause that lasts for longer than one year to be reasonable.

The geographical coverage of a restraint of trade is also relevant when determining reasonableness. Worldwide restrictions are typically found to be invalid, unless the restriction requires worldwide coverage to be reasonably effectual. The Court has upheld restraint of trade clauses where worldwide coverage was necessary because of the nature of the industry in question and the impracticalities of enforcing a less onerous restraint of trade clause; however, this is the exception, rather than the general rule.

Consideration

If an employee signs an employment agreement containing a restraint of trade provision, it is assumed there is consideration for the restraint of trade as this was part of the bargaining process. Therefore, a restraint of trade included in an employment agreement at the outset will not necessarily be unreasonable.

Restraint of Trade Clauses – Court Powers and Contracting Out of the Court’s Jurisdiction

If a party cannot prove that a restraint of trade clause is enforceable, the Court has a jurisdiction to alter a restraint of trade to make it enforceable or to delete it from the employment agreement. This typically involves reducing the geographical coverage and/or the duration of the restraint. We are unsure whether parties can later agree to alter an invalidated restraint to make it enforceable, as we have not been able to find any case law on this point.

If the Court finds that an employee has breached a valid restraint of trade clause, it may require the ex-employee to pay exemplary and/or compensatory damages. It may also issue an injunction preventing an ex-employee from carrying out the conduct which constitutes a breach of the restraint of trade.

Conflict of Interest Clauses

Case law seems to be silent as to the effect of conflict of interest clauses after the termination of an employment agreement. Therefore, if an employment agreement does not mention the effect of a conflict of interest clause post-employment, there is an argument that the conflict of interest clause no longer applies.

 

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Should you need any assistance with this, or with any other Employment matters, please contact Hannah Carey – hannahcarey@parryfield.com  or any of the team at Parry Field Lawyers should you need assistance – 03348 8480