Restrictive Covenants Overview

A clause in a contract that restricts a party's ability to compete with the other party, often related to how much they can work in a specific area or for certain clients, to protect a business's interests.

Reason for enforcing restrictive covenants; protecting a company's specific business interests from unfair competition and loss of clients.

A legal case (1933 SC 148) illustrating a two-year, one-mile radius restriction against competition that was upheld as reasonable.

The legal concept of whether a part of a contract can be removed without changing other parts to the point of no longer being the agreement of both parties.

A legal case (UKSC 32) involving clarifying restrictive covenants, specifically, the 'blue pencil test' and its application in analyzing the reasonable clauses within contracts

Agreements that restrict a seller's ability to compete with the buyer after selling a business. The law generally upholds these agreements.

The extent to which a restrictive covenant is appropriate given the nature of the restriction and the interests being protected.

Balancing the parties' interests with the broader implications for commercial vitality and individual worker's livelihood.

Contracts that limit an employee's ability to work for a competitor after leaving a job.

Specific reasons an employer can restrict an employee's future activities—e.g., protecting confidential information, trade secrets, or business methods.

Information deemed critical to a company's operations and competitive edge, often protected by restrictive covenants.

Confidential information that gives a business a competitive advantage and is typically protected by restrictive covenants.

Methodologies and procedures used by a business to conduct operations—e.g. process improvements and protocols.

A contract term that restricts the activities of a former employee or seller of a business.

A legal concept about limiting a person's ability to work or conduct business.

A legal case that established a test for the reasonableness of restrictive covenants, needing justification in terms of special circumstances.

Interests protected by the restrictive covenant that are reasonably necessary for the employer or buyer.

The balance of protection to the benefiting party versus restricting the other party's ability to work/do business. The covenant must be reasonable in relation to the parties.

The restrictive covenant must be in the best overall interest of the public. Restrictions must not harm the public.

Initially presumed to be invalid or unenforceable, requiring justification.

A restrictive covenant must be correctly included in a contract, with sufficient formality.

A clause in a contract that punishes a party for breaching the contract by requiring them to pay a large sum of money, even if the actual damages are much less.

A clause that is excessively high or unfair, showing that the party who wrote it was trying to scare the other party into complying.

The main purpose of the contract, the core agreement between the parties.

A clause that comes into play only if there's a breach of the main contract, like a 'backup' plan.

A clause that imposes a penalty that is much larger than the harm caused by the breach, unfair and excessive.

A contract clause that changes the price based on certain conditions, often used to reflect the value of a business or its goodwill.

The positive reputation and customer loyalty of a business.

A contract clause that specifies a fixed sum payable if one party breaches the agreement.

A contract term that is legally valid and can be enforced by a court.

A contract term that is legally invalid and cannot be enforced by a court.

The legal principle determining the amount of compensation for breach of contract. It aims to put the injured party back in the position they would have been in had the breach not occurred.

Damages awarded to compensate the injured party for their actual losses caused by the breach.

A landmark case involving four torpedo boats delivered late, illustrating the difference between liquidated damages and penalty clauses.

A case that established the 'genuine pre-estimate of loss' test, focusing on the clause's purpose and whether it reflects actual damages.

Parties use these clauses to pre-determine damages and avoid lengthy court battles in case of a breach.

A liquidated damages clause is valid if it represents a genuine pre-estimate of the potential losses and is not considered a penalty.

A penalty clause is invalid if the amount specified is disproportionate to the actual harm caused by the breach.