The doctrine of restraint of trade is a legal device to attempt to hold the balance between two competing factors - an employee’s freedom to take employment as and when he wishes, and an employer’s interest in preserving certain aspects of his business.
Both factors are important, and indeed the law will protect the employer if necessary by the implication of the term fidelity in the contract of employment thereby restraining the employee inter alia from divulging confidential information.
However, the employer may wish to go further and extract an express promise from the employee: a) Not to disclose certain information,
b) Not to place himself in a position in which he may do so, e.g. by not working for a competitor for a certain period of time within a certain area after leaving the employment.
It is thus established that an employer can stipulate for protection against having his confidential information passed on to a rival in trade. But experience has show that it is not satisfactory to have simply a covenant against disclosing confidential information.
The reason is because it is so difficult to draw the line between information which is confidential and information which is not; and it is very difficult to prove a breach when the information is of such a character that a servant can carry it away in his head. The difficulties are such that the only practicable solution is to take a covenant from the servant by which he is not to go to work for a rival in trade. Such a covenant may well be held to be reasonable. (RESTRICTIVE COVENANT)
The question then arises whether any given restraint clause is valid and enforceable against the ex-employee, or void?? The modern law on restraint of trade is to be found in Nordenfelt v Maxim Nodernfelt Guns and Ammunition Co and Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd a case on ‘solus’ agreements in the garage trade, where the HOL reconsidered the whole doctrine.
Nodernfelt Case : A restraint of trade clause is to be considered void unless the party alleging its validity can prove that it is : a) Reasonably as between the parties.
b) And it is in the public interest.
Esso Petroluem case:
- Confirmed that not all agreements which restrain a person’s freedom of action are subject to the doctrine, for some are so accepted as normal incidents of particular businesses or transaction that they are not subject to challenge, e.g. tied houses in the brewery trade are valid. - The test for deciding what is subject to the doctrine and what is not subject is not entirely clear, but what is important is that the HOL said clearly that restraint clauses by employees in favour of employers are definitely subject to the doctrine. - Public interest- is now revived under this case.
Restraint clauses in contracts of employment are amenable to challenge, the next relevant questions are: a) What interest warrant protection,
b) How extensive can the restraint be if it is to be valid, c) And what remedies are available to the parties.
I) Protectable interest
An employer cannot simple restrain an ex-employee from competing with him in an ordinary manner; it must go beyond that, and in the employment context this meant that the restraint must be necessary to protect either: a) Trade secrets
b) Or, customer connections.
Note this: grounds on upholding these interest: an employee might have obtain such personal knowledge of, and influence over, the customers of his employers, or such an acquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employer’s trade connection or utilise information confidentially obtained (Herbert Morris Ltd v Saxelby (HL) affirmed by Faccenda Chicken Ltd v Fowler)
From this basic principles, certain important points arise.
1) Difficulty to define trade secret.
What is trade secret??
It is an...