RESTRAINT OF TRADE

At present, the law will not enforce certain types of contracts on the ground of illegality. Contracts in restraint of trade are contracts which have the effect of restricting a person's freedom to conduct business in a specified or unspecified location for a specified or unspecified length of time. The general rule is that such contracts are void, unless they are reasonable in the interests of both contracting parties and of the public at large (Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535). Contracts between employer and employee and contracts for the sale of businesses which include terms which would restrict the free conduct of business are subject to this rule.

Employment contracts which include restraining clauses, are generally held to fulfill the requirements in Nordenfelt providing that:

• There is an interest which needs to be protected. Examples of such interests include business connections and trade secrets.
• The restraint is reasonable, i.e. sufficiently protects the interest and goes no further.
• The restraint is not contrary to the public interest (e.g. prevents a physician working in an area where there is a shortage of physicians).

Generally, if a restraining clause is found to be unreasonable, then it will be void. In certain circumstances though the court may uphold it either by construing ambiguities or by severance. Severance consists of the application of what is known as the "blue pencil test"; if individual words which make the clause excessively wide are able to be crossed out and the clause still makes grammatical sense, without altering the nature of the obligations, then the courts may be willing to sever the illegal aspects of the clause and enforce the remainder.