The contract may constitute a crime or a tort. The violation may be of a statutory rule or of common law.

Breach of common law

There are a number of factors which may make a contract illegal at common law, the most important being where there is a contract to commit a crime or tort. Our particular interest in practice are contracts in restraint of trade.

Contracts in restraint of trade

The issue of restraint of trade concerns contracts which limit an individual’s right to use his or her skills for payment, or to trade freely. Such contracts fall into four groups:

  • Contracts for the sale of a business where the vendor promises not to compete with the purchaser.
  • Contracts between businesses by which prices or output are regulated.
  • Contracts in which an employee agrees that on leaving the company, they will not set up in business or be employed in such a way as to compete with that employer. This is common in businesses where personal skills and reputation attract customers, such as hairdressing or advertising. Such contracts tend to provide that the employee should not set up a competing business, or take a job with a competitor, within a certain geographical area and/ or within a certain period of time after leaving. The main reason for such contractual terms is the concern that the employee may take customers with them to the new employer or business.
  • Contracts where a person agrees to restrict their mode of trade. This is sometimes called a solus agreement.

Any of the above types of contracts may amount to what is called a general restraint, if the contract completely prohibits trading, or a partial restraint if it limits trading to a certain time or area.

The court must be satisfied that the party making the restriction actually needs to protect their interest. The only legitimate interests employers may seek to protect are their relationship with customers and their trade secrets.

Restrictions designed simply to prevent competition will not be upheld by the courts.

In considering reasonableness, the court must be satisfied that the agreement is no wider than is necessary to protect those interests and the scope of the restraint and the area and period of time it covers are all properly balanced against one another. Thus a restriction might be held void if applied over a large geographical area, or for a long time, but it might equally be valid if it only covered a small area or was to last for a short time.

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