RESTRAINT OF TRADE.—When a man enters into a contract whereby he limits his general freedom to trade or pursue a particular occupation, that contract is said to be " in restraint of trade." Such a contract must be in writing, made for a valuable consideration, and reason able in its terms. Otherwise it will have no validity and cannot be enforced. The valuable consideration is necessary, even though the contract is contained in a deed. Whether its terms are masonable or not will always depend upon the circumstances of the particular case. Contracts of this class are usually entered into in connection with such transactions as the sale of a business [see GOODWILL] or the engagement of an employee, the restraint being imposed upon the seller and the employee respectively. The object is to prevent an unreasonable trade competition. To effect this a seller would covenant with the purchaser not to engage in a like business to that he has just sold within a certain period of time, or within a certain limit of space, or amongst a certain specified class of persons, or in terms comprehending more than one of these limitations or some appropriate modification or extension of them. An employee would covenant on somewhat similar lines.
As a rule, when a covenant in restraint of trade is attached and the person restrained desires to escape from his obligation, the great contention is whether the restraint is a reasonable one. The leading case on this is Nordenfeldt v. The Maxim Nordenfeldt Co. There the seller of a gun and ammunition manufacturing business had covenanted not to engage, in any part of the world, in a business of a like description for a period of twenty five years. He contended that the covenant was invalid because it was in effect a universal one and prevented him from earning his living in any part of the wide world. The House of Lords held, however, that the covenant though unrestricted as to space was not, having regard to the nature cf the business and the limited number of the customers (namely the governments of this and other countries), wider than was necessary for the protection of the company to which the business had been sold ; nor was it injurious to the public interests of this country. Lord Herschel' said : " I think that
a covenant entered into in connection with the sale of the goodwill of a business must be valid where the full benefit of the purchase cannot be otherwise secured to the purchaser. It has been recognised in more than one case that it is to the advantage of the public that there should be free scope for the sale of the goodwill of a business or calling. These were cases of partial restraint. But it seems to me that if there be occupations where a sale of the goodwill would be greatly impeded, if not prevented, unless a general covenant could be obtained by the purchaser, there are no grounds of public policy which countervail the disadvantage which would arise if the goodwill were in such cases rendered unsaleable." His Lordship adopted the test of Chief-Justice Tindal in Horner v. Graves. Is the restraint, such as only to affOrd a fair protection to the interest of the party in favour of whom it is given, and is not so large as to interfere with the interests of the public ? " Whatever restraint is larger than the necessary protection of the party can be of no benefit to either ; it can only be oppressive, and, if oppressive, it is, in the eye of the law, unreasonable." At one time a radius of 150 to 200 miles would have been considered as very nearly approaching the line of the unreasonable. To-day, however, in view of modern facilities for travel and transport, the entire kingdom may be validly barred to a party by his covenant ; but of course the particular circumstances of the case must always be considered.
A valid covenant in restraint of trade will be enforced, as against the party restrained, by an injunction, even though the covenant provides a penalty or specified sum of liquidated damages or in case of breach and the party is willing to pay it.