Restraint of Trade
Oct. 13, 2021
Restraint of trade clauses are covenants that seek to protect the employer’s proprietary or commercial interests. These clauses typically seek to restrict an employee from competing against the employer by setting up a business on the employee’s own account or working for a rival during the period of employment or after the employment comes to an end.
Although restraint of trade clauses are prima facie invalid at common law, they may be upheld if an employer can show that the covenant was reasonable with reference to the private interests of the parties concerned and the interests of the public at large. The test for assessing whether a restraint of trade clause is reasonable was set out by the Employment Court in Warmington v AFFCO New Zealand Ltd:
A number of factors are to be considered in determining the reasonableness or otherwise of a restraint of trade provision. Restraints by employers are enforced only to the extent required to protect a proprietary interest of the employer. The nature of the employee’s role and the employer’s business, the geographical scope of the restraint, and its nature and duration are relevant factors in assessing whether a restraint is reasonably necessary.
Section 83 of the Contract and Commercial Law Act 2017 gives the Authority or the Court the power to delete or modify an unreasonable restraint of trade clause.
If an employee breaches a restraint of trade clause, the employer may enforce the restraint by seeking an interim injunction from the Authority. An employer may also seek damages to cover the loss and penalties for breach of the duty of good faith or breach of contract.
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Disclaimer: The information contained in this article is general in nature and not tailored to your personal circumstances. It is only current as at the date posted and should not be relied upon as legal advice. If you require legal advice, please contact us for further assistance.