Restraint of trade clauses, often referred to as restrictive covenants (something you cannot do) or non-compete clauses, are commonly found in commercial and employment contracts. These clauses restrict what an individual or business can do, usually during employment and for a period after termination.
They are designed to protect a business’ legitimate interests, such as:
- Existing client relationships
- Confidential information and trade secrets
- Commercial knowledge and intellectual property
- Reputation and goodwill
In employment contracts, post-termination non-compete clauses may also appear in settlement agreements.
However, while these clauses are common, they are not automatically enforceable. The Courts approach restraint of trade provisions cautiously because they interfere with an individual’s ability to work and trade freely.
So, how enforceable are restraint of trade clauses in practice?
Can I Challenge the Enforceability of a Restraint of Trade Clause?
It depends on the facts of the case.
If the restriction seeks to prevent trade for a longer period of time, or across a wider geographical area than is considered reasonable by the Courts, it is more likely that the clause could be successfully challenged.
Under the common law doctrine of restraint of trade, a clause will typically only be valid if it is considered reasonable, both in relation to the parties’ legitimate interests and the wider public interest.
Importantly, when a restraint of trade clause is challenged, it is generally for the employer (or the party seeking to rely on the clause) to show that the restriction is reasonable.
What Makes a Restraint of Trade Clause “Reasonable”?
The concept of “reasonableness” is central to the enforceability of restraint of trade clauses.
When assessing whether a restrictive covenant is enforceable, the Courts will generally consider three key limbs:
The construction of the covenant, its scope and wideness
This includes the duration of the restriction, the geographical area covered and the type of activities restricted. Clauses drafted too broadly are more likely to be struck down.
Whether there is a legitimate business interest requiring protection
A restraint of trade clause must protect a genuine business interest, such as confidential information, trade secrets, customer connections or goodwill. It cannot simply be used to prevent competition.
Whether the restriction is no greater than reasonably necessary to protect the business or employer’s interests
Even where a legitimate interest exists, the restriction must be proportionate. If a narrower clause would adequately protect the business, a wider restriction may be unenforceable.
Every case will turn on its own facts, including the individual’s role, seniority, access to sensitive information and the nature of the business.
Conclusion
Whilst every case is fact-dependent, drafting restraint of trade clauses too widely can render them ineffective and open to challenge.
However, when drafted carefully and tailored to protect legitimate business interests, restrictive covenants can be powerful tools in safeguarding commercial interests.
To successfully enforce a restraint of trade clause, the restriction must satisfy the reasonableness test under UK law.
We’re here to help
If you are seeking to enforce a restraint of trade clause, or you have been asked to comply with one, our Dispute Resolution Team can provide clear, practical advice on your position and next steps.
Get in touch with our team today to arrange a meeting with one of our experts. Speak to a member of our team on 0800 118 1500 or complete the form below.
Disclaimer
This blog was written by James Stuart, Trainee Solicitor, in our Dispute Resolution Team. The contents of this blog, or any other published by Talbots Law, cannot be considered as legal advice so you should take no action without prior consultation with a qualified solicitor or legal professional. The contents of this blog refers to the process in England and Wales.