Restraint of Trade Deeds

A restraint of trade agreement is a contract that limits one party’s ability to engage in business activities that could compete with another party. Common in various industries, these agreements are often designed to protect sensitive information, business interests, and relationships. Restraint of trade agreements appear frequently in employment contracts, mergers, partnerships, and sales of businesses. They aim to prevent unfair competition while balancing the rights of individuals to work and conduct business.

Types of Restraint of Trade Agreements

Several types of restraint of trade clauses are often included in these agreements:

1. Non-Compete Clauses: These restrict individuals or businesses from directly competing with another company, typically for a specific time period and within a defined geographic area. For example, an employee might be prohibited from working for a competing business in the same region for a set number of years after leaving a job.

2. Non-Solicitation Clauses: This type prevents one party from soliciting or contacting the other party’s clients, customers, or employees. It’s common in employment contracts to prevent departing employees from taking clients or talent to a competitor or their own business.

3. Confidentiality or Non-Disclosure Agreements (NDAs): While not technically a restraint of trade, NDAs are often associated with restraint agreements. They prevent employees, partners, or contractors from revealing confidential information or trade secrets that could benefit competitors.

4. Non-Dealing Clauses: This type restricts individuals or businesses from dealing with a company’s clients or customers, even if the customer initiates the relationship. Non-dealing clauses are common in sales and acquisition agreements to protect the buyer’s access to existing client relationships.   

Key Elements of Restraint of Trade Agreements

Some essential components of restraint of trade agreements include:

• Scope of Restriction: The scope defines what activities or business actions are restricted, such as competing within a specific field or soliciting specific clients.
• Geographic Limitations: These clauses often restrict competition within a certain geographic area. For example, an employee may be restricted from competing within a certain number of miles of the former employer’s business.
• Duration: Time limits define how long the restrictions will be in effect, such as one year post-employment or after a contract ends.
• Consideration: This is often compensation or other benefits offered in exchange for agreeing to the restraint. Courts require consideration to enforce restraint of trade agreements.
• Reasonableness: The terms must be reasonable to be legally enforceable. Courts will examine whether the restraint goes beyond protecting legitimate business interests.

Enforceability of Restraint of Trade Agreements

While these agreements aim to protect business interests, they must also be fair. Courts often evaluate:

• Business Necessity: Whether the restriction protects a legitimate business interest, such as trade secrets, customer relationships, or specialized training.
• Reasonableness: Restrictions on scope, duration, and geography must be reasonable, balancing the need to protect business interests with the individual’s right to work.
• Public Interest: Courts may consider whether enforcing the agreement would be contrary to public interest, such as preventing competition in an essential industry.

Why Restraint of Trade Agreements Matter

Restraint of trade agreements help businesses secure valuable resources, retain client relationships, and maintain competitive advantages. For example, they protect companies from the risk of former employees or partners using insider knowledge to establish a competing enterprise. However, courts scrutinize these agreements to ensure fairness, as overly restrictive clauses can hinder individuals’ ability to work and innovate. When balanced, these contracts are essential for business stability, protecting proprietary information, and fostering long-term, trustworthy partnerships.