The prevalence of restraint of trade clauses has surged in recent years, with some companies incorporating these clauses into contracts across all levels of employment, even for entry-level positions. However, the judicious use and careful drafting of such clauses are imperative, as they undergo meticulous scrutiny by legal professionals or the court, particularly when enforcement is attempted.

In our blog post, “The Cost of Breaching a Restraint of Trade,” we highlighted that restraint of trade clauses are initially deemed void and unenforceable. To be enforceable, a restraint must meet two key criteria:

1. Legitimate Proprietary Interest:

Restraint clauses cannot be wielded to thwart mere competition. Instead, they must protect a legitimate proprietary interest. This interest typically encompasses trade secrets, confidential information, and business connections, such as client relationships. Courts assess whether the employer’s proprietary interest is genuinely at risk, focusing on factors like the employee’s influence over clients.

2. Reasonableness:

After establishing a legitimate proprietary interest, the next step is to gauge the reasonableness of the restraint between the parties and in the public interest. This evaluation is a legal matter considered at the contract-signing juncture. The clause’s reasonableness hinges on factors such as:

– Bargaining powers during contract signing.

– The employee’s role and access to confidential information.

– Geographical scope of restraint.

– Consideration given, including contract duration, trial periods, notice periods, and whether the restraint was added as a contract variation.

– Restraint duration, where a general rule suggests restraints exceeding 12 months may be deemed unreasonable.

– The employee’s position upon leaving, including whether garden leave was implemented.

Crafting effective restraint of trade clauses is a complex endeavor. Employers engaged in contract drafting, review, or updates should approach restraint clauses with careful consideration. While seemingly protective, an ill-conceived or unenforceable clause can lead to futile and costly enforcement attempts. Engaging legal counsel from the outset ensures appropriateness and meticulous drafting, enhancing the clause’s enforceability and protecting your business interests.