Contract Restraint of Trade Definition: Everything You Need to Know
In the world of business, contracts are essential. They help to establish agreements between parties and outline the terms and conditions of a partnership. However, there are certain clauses within contracts that can restrict an individual`s ability to work in their industry or trade. This clause is known as a restraint of trade clause. In this article, we`ll explore what a contract restraint of trade definition is and what it means for employees and employers.
What is a Restraint of Trade Clause?
A restraint of trade clause, sometimes called a covenant not to compete or non-compete clause, is a contractual provision that restricts a party`s ability to engage in certain activities following the termination of a contract. Typically, these clauses are included in employment contracts to prevent employees from leaving and taking their skills and knowledge to a competitor. These clauses can also be included in a sale of a business to prevent the seller from starting a competing business.
Types of Restraint of Trade Clauses
There are two primary types of restraint of trade clauses: Non-compete and non-solicitation.
1. Non-compete: A non-compete clause prohibits an individual from engaging in a similar business or trade that is in direct competition with their former employer. This means that an employee may not work for a competitor or start their own business in the same industry for a specified period of time, often referred to as a “restricted period.”
2. Non-solicitation: A non-solicitation clause prohibits an individual from soliciting or doing business with the clients or customers of their former employer. This means that an employee cannot directly or indirectly approach clients to transfer their business to a new employer or business.
Are Restraint of Trade Clauses Enforceable?
The enforceability of a restraint of trade clause depends on several factors, including the type of clause, the length of the restricted period, and the reasonableness of the clause. Generally, courts will uphold a restraint of trade clause if it is reasonable and necessary to protect the legitimate interests of the employer. However, if the clause is too restrictive or the restricted period is deemed excessive, then it may be considered unreasonable and unenforceable.
Conclusion
A restraint of trade clause is a common contractual provision used by employers to protect their business interests. However, it is important to ensure that the clause is reasonable and necessary to avoid the risk of the clause being deemed unenforceable by a court. Employers and employees alike should seek legal advice before entering into any contract containing a restraint of trade clause to ensure that their interests are protected.