By Alan Knowsley, a partner in Rainey Collins Lawyers
Restraint of trade clauses can be a tricky business. The courts have traditionally shown a hostile attitude towards them, as they limit the freedom of one party and hinder competition.
Food technology companies who wish to include a restraint of trade clause in their employment contracts need to carefully consider the extent of the restraint.
While it may be tempting to try to prevent an employee from working for the competition or setting up a new food technology company, you may be asking for trouble if you try to do so.
In order for a restraint of trade clause to be enforceable it must be reasonable, and there must be an actual interest to be protected.
In a recent case the restraint of trade clause provided that for two months after finishing work at a company, the worker could not be involved directly, or indirectly with the sale or distribution of the same, or similar products.
The company sought to enforce this restraint of trade when the worker took up employment with a competitor, but failed as the clause was too wide, and therefore not reasonable.
The worker had offered an undertaking to not directly compete with the company while working for the first two months of working for their competitor, by not approaching their customers in the region.
This undertaking was sufficient to protect the interests of the company by protecting their trade connections and customer goodwill.
If the restraint of trade had been as specific as the undertaking, it is likely it would have been enforceable. However, since it was much wider, the restraint of trade was held to be invalid.
Another reason the company failed in its attempt to enforce the restraint of trade was that it could not show any loss they had suffered from their former worker moving to the competition.
They had not lost any business, as the former worker had not approached any of their clients.
The company here seemed to be more interested in restricting competition than genuinely protecting their interests.
Another example of this was where a restraint of trade clause attempted to stop a former employee from seeking similar work in the whole of New Zealand for three months.
This clause was understandably held to be unenforceable.
Restraint of trade clauses cannot be used to prevent competition, and if you want yours to be effective you need to draft it very carefully.
Implementing a ‘catch-all’ clause like those described above will not be effective.
For more information, contact
Rainey Collins Lawyers
Tel: 0800 733 424
Visit: www.raineycollins.co.nz
Email: [email protected]
