It is common for contracts between businesses to contain provisions that are aimed at preventing one of the parties from competing against the other (often called “restraint of trade” clauses). The enforceability of such clauses has long been debated.
Under UK law the following requirements must be satisfied for a restraint of trade to be valid:
- the party imposing the restraint must have a legitimate interest that they seek to protect;
- the restraint must be no wider than is reasonable to protect that interest;
- the restraint must not be against public interest.
In a recent case the Supreme Court re-examined this area. The Court stated that two principles must be taken into account in determining the enforceability of a non-competition obligation:
- The party which has the benefit or the restriction must establish that the non-compete was reasonable as between the parties by showing that it not only protected that party’s legitimate interests, but that it also went no further than was reasonably necessary in doing so.
- Assuming the test in paragraph 1 above is met, the party subject to the restrictions has the burden of establishing that it is unreasonable due to be against public policy.
Of particular interest in this case is that the Supreme Court determined that account can be taken of the parties’ non-contractual intentions, or what they contemplated, when entering into the contract. This means that there is no need for the legitimate interests to be specifically referred to in the contract. The validity of a restraint of trade must be determined in the light of what may happen under the agreement, although what may happen could include possibilities which do not in fact ever occur.
For a “legitimate interest” to be potentially protected, that interest does not have to be something which is directly related to the contract containing the restriction. In the case examined by the Supreme Court, the contract in question was a confidentiality agreement (also known as a non-disclosure agreement). The purpose of the agreement was simply to allow the flow of information from one party to the other, but the agreement contained a clause effectively preventing the recipient of the information from exploiting it for its own purposes. This was found to be enforceable, even though the agreement did not express that the provider of the information had any obligations or expectation of its own in relation to that information.
