Are restraint of trade clauses worth the bother?
Posted: 12 September 2019
Restraint of trade clauses are common in the sale and purchase of a business and in some employment agreements. In a business context, they offer protection to a buyer who has acquired a business and prevent the seller from directly competing against the buyer. A restraint provision in an employment context is designed to protect the employer’s business interests when key employees leave. There’s a general perception that these clauses are difficult to enforce, so why bother?
Non-competition restraint – sale of a business
The purpose of a non-competition restraint in regard to the sale of a business is to ensure that the purchaser is able to retain the benefits of the business they have purchased including existing and potential customers. It prevents the seller from establishing, working for or being involved in a similar business. Non-competition restraints are routinely used in the sale and purchase of businesses.
Non-competition restraint – employment agreement
The first consideration before inserting a restraint of trade clause in an employment agreement is to decide whether or not you, as the employer, have a proprietary right (be it trade connections or trade secrets) which might be considered reasonable to protect. The effect of a restraint in an employment agreement is to prevent your employee from working for a competitor or opening a competing business immediately after their employment ends. Due to the restriction placed on any employee’s livelihood, the necessity for the restraint (which will benefit you as their employer) must be balanced against your employee’s right to earn an income (a restriction for your employee).
DISCLAIMER: All the information published in the Property eSpeaking, Commercial eSpeaking, Trust eSpeaking, Rural eSpeaking, and Fineprint newsletters is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this article. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in Property eSpeaking, Commercial eSpeaking, Trust eSpeaking, and Fineprint may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2019. Editor: Adrienne Olsen. E-mail: [email protected]. Ph: 029 286 3650 or 04 496 5513.
