M+A: Restraint & non-solicit agreements

Introduction

Restraints of trade can take many forms, but the common feature of all restraints of trade is that they comprise an obligation, imposed by a contract or a deed, which prevents the person who is bound by it from engaging in certain forms of conduct in particular circumstances.

A restraint of trade is justifiable only if the restriction is reasonable in reference to the interests of the parties and of the public. This is called the restraint of trade doctrine and it comprises a considerable body of case law. If the application of the doctrine to a particular restraint (which is always considered at the time the contract was made not at the time the restraint is being enforced) leads to the result that the restraint is unreasonable, then it will be contrary to public policy and declared to be invalid.

The courts in general take a stricter and less favourable view of restraints of trade entered into between an employer and employee than of similar covenants in commercial agreements (eg a sale of business agreement), but a well drafted restraint is enforceable.

Types of restraints

The most common types of restraint are:

  • employee disruption restraints
  • competing employment restraints
  • non competition restraints
  • non solicitation restraints
  • gardening leave (a quasi restraint)

In employment contracts these restraints often apply during the term of employment and for a period following termination of the employment relationship.

During the currency of an employment contract the pendency of the contract will usually be sufficient justification of their reasonableness, particularly if they are aimed at absorbing the employee’s capacity as opposed to merely precluding competition.  The fact is that most cases that find their way to court consider the reasonableness of post employment restraints. 

Drafting issues

The received wisdom is that trying to enforce a restraint of trade against a former employee is a waste of time.  This is only true if no care has been taken in drafting the restraints in question.  This is one of those areas of the law were slavishly copying precedent clauses or adopting provisions that might have been used in someone else’s employment contract can prove futile.

The types of drafting issues that need to be dealt with include the following:

  • the geographic area of the restraints
  • the duration of the restraints
  • linking the restrained conduct to a business that is similar to the ex employer’s business and which trades in competition with the ex employer
  • defining clients/customers with appropriate precision ensuring that an appropriate nexus exists between them and the ex employee
  • defining the employer’s business with appropriate precision particularly if it comprises different divisions
  • ensuring that both direct and indirect conduct is captured

Duration of restraints

This involves a period sufficient to permit the employer to replace the employee and allow the replacement a reasonable opportunity to prove his or her competence to customers.  Generally, highly paid ex-employees attract longer periods of restraint. Typically the outer limit will be somewhere around 12 months post termination of employment.

Geographic area

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