1. CHAPTER 14
ILLEGALITY
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2. HOW ARE CONTRACTS AFFECTED BY THE LAW?
Objects of a contract
Statute law Common law
Illegal Illegal
Void Void
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3. CONTRACTS IN RESTRAINT OF TRADE
A restraint of trade is limiting or restricting a person’s freedom to work
Two common examples of contracts likely to contain such restraints are:
Contracts for Sale of Business
Employment Contracts
At common law any restraint of trade may be void unless REASONABLE (see Nordenfelt v Maxim)
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4. WHAT IS REASONABLE?
In determining reasonableness, the courts will look at various factors including:
the geographical area of restraint
the duration (time limit) of restraint
the type or nature of the business
the specific wording of the restraint
the bargaining powers of each party
the consideration supplied
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5. EMPLOYMENT CONTRACTS
Reasonable restraints of trade in employment contracts may be permitted for legitimate business reasons such as:
Protecting confidential information
Protecting trade secrets or secret processes
Protecting confidential lists of customers or clients
Even where a restraint may be commercially justified, it may not be allowed unless it is “reasonable”
Any restraints solely to prevent competition are INVALID
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6. EXTENT TO WHICH RESTRAINT OF TRADE IS VALID
The Restraint of Trade Act 1976 (NSW) states that any restraint of trade is valid to the extent that it is not against public policy
Under this Act the Supreme Court may order any restraint of trade totally invalid or invalid to the extent it thinks fit. In effect the court may “read down” any unreasonable restraint to the extent it believes appropriate
Unreasonable restraints might be severed (removed) to allow the remainder to be enforced (Rentokil Pty Ltd v Lee)
Contracts may contain “ladder” or “cascading” clauses that may allow a court to select the most reasonable restraint from a selection of restraints of differing severity (Hitech Contracting Ltd v Jane Lynn)
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7. Where are restraints of trade likely?
Contracts in restraint of trade at common law can be divided into the following categories: 1. Those made when a business is sold to protect the purchaser’s goodwill in the business against undue competition by the seller 2. Those made in employment contracts to restrain an employee after termination of employment (from using confidential information or using their occupation) 3. Restrictive trading agreements, eg price maintenance or franchises
2011 Thomson Reuters Legal & Regulatory Ltd. All Rights Reserved. PowerPoint slides to accompany A Guide to Business Law, 19th Edition