Fraying Restraint of Trade and Non Compete Clauses

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Frayed wire rope
October 20, 2014

A case we were involved in recently has highlighted yet again some important points about the effectiveness of restraints of trade or non compete clauses in employment contracts.

In this case, it was alleged that an employee had established a company during her employment, and diverted business to the new company – which was in direct competition with the former employer – following the end of her employment. The employment contract contained various restraint clauses and a cascading non compete clause. It was alleged that these clauses prohibited the conduct the employee had taken, that the new business was quite successful and that the employer’s business had declined as a result. 

We argued that the restraint and non compete clauses were unenforceable, being contrary to the common law doctrine against illegal restraints of trade. We were ultimately successful in that argument, and even managed to have money otherwise owing to the employee under the employment contract paid to her. 

The important point is that, generally we find that such restraint clauses or non compete clauses are unenforceable, owing to illegality, and even if the employee understood the effect of such a clause and signed it willingly. However, that is usually owing to the way in which they are drafted, in addition to some circumstances; most of which can be changed to ensure effectiveness.

Bear in mind that the doctrine against illegal restraints of trade is only a presumption – when certain conditions are met, such a clause will be enforceable, and damages may be payable, although, as with most things, there must be proof of actual damage. 

If you are an employer with a legitimate interest in protecting your business, or an employee wishing to take new employment, start a new business or do something else that might be contrary to the terms of your employment contract, it would be worthwhile giving us a call.

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