Restraint of trade

The Court of Appeal recently released a judgment concerning the scope of a restraint of trade clause, following the sale of a business. The business bought by the purchaser involved the manufacture, distribution and installation of partitioning systems and door systems, commonly used in office fit-outs. Shortly after the sale, the vendors bought another business that was a supplier of components of partitioning and door systems.

The sale and purchase agreement signed by the parties included a restraint clause that sought to prevent the vendors from engaging in any business that was “the same or substantially similar to” the business being sold to the purchasers. Importantly, the restraint specified the business activities it sought to protect:

namely the manufacture, importation distribution or installation of … partitioning systems or door systems”.

The purchaser believed that the vendor was in breach of the restraint of trade clause given the relatedness of the products being sold, and the High Court agreed. However, the Court of Appeal thought differently. Overturning the decision of the High Court, the three judges held that the business activity of each business was not the same or substantially similar on account of the fact that the business that was sold by the vendor dealt with complete systems, while the business that was bought dealt only with components of such systems.

In reaching its conclusion, the Court relied on the specific wording in the restraint clause. Because the clause named complete systems only, and because componentry could not be regarded as a complete system and only a small part thereof, there was no substantial similarity.

The decision has highlighted the importance of using wording in a restraint that will provide the parties with the certainty required for them to understand the parameters of what is being agreed. Had the clause used in this situation included the further wording:  

namely the manufacture, importation distribution or installation of … partitioning systems or door systems, and including componentry of such systems”, 

there is a possibility this matter would have been decided differently or may never have made it before the Courts in the first place. Of course, expanding the scope of a restraint of trade clause too widely may result in it being deemed invalid. So, the specific wording used should be carefully considered and seek only to extend the scope of protection to a reasonable level.

If you need any advice or assistance in determining the reasonableness or validity of a restraint of trade clause, please remember that it is better to seek help prior to making any big decisions. You may save yourself the headache of being embroiled in legal action and be in a position to move forward with confidence.