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Illegal Contracts And Restraint Of Trade Clauses Notes

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This is an extract of our Illegal Contracts And Restraint Of Trade Clauses document, which we sell as part of our Labour Law Notes collection written by the top tier of University Of Otago students.

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31st March 2011: Labour Law: Illegal Contracts/Restraint of Trade Clauses: Relatively common. Often in contracts where they shouldn't be. Seen in contracts of construction workers - totally unreasonable. Quite often they are put into contracts to scare people off quitting or working for the competition. Restraint of trade clause: agreement between the parties whereby the employee will not resign and work for a competitor or work for themselves in doing a particular type of work, for a particular length of time, in a particular location. If the worker breaches the restraint the remedies that may be sought are an injunction (interim or permanent), or damages. H & R Block: Case where damages were sought. Basic rules/issues in restraint of trade cases:

* When is a restraint of trade clause unreasonable and therefore unlawful and therefore unenforceable?
* There must be a proprietary interest to protect. Interest in the nature of property. One thing that an employer cannot protect against on its own is competition, for public policy reasons. Two main types of proprietary interest:
# Confidential information such as business plans, trade secrets. Things that the employer has a right to protect.
# Trade connections, or goodwill. Goodwill can be bought and sold.
* The covenant must be reasonable. Unreasonable restraint of trade covenants are illegal. Reasonableness is usually measured in relation to the proprietary interest or information that the employer is trying to protect. No fixed test here, each case depends on its own facts. Generally you focus on the scope or the nature of the activity that is being restrained, the time length of the restraint, and the geographical area. Needs to be quite specific. Time length will depend on the nature of the activity. There comes a point when information becomes 'stale'. Geographical area depends on the facts - could be the whole world if you're an international software designer. H & R Block:
- Business of preparing tax forums for waged salary earners. The employee was a tax person employed in the Chch office.
- Restraint of trade: not to engage in the business of preparing tax returns for 5 years, within 25 miles of the Chch office. The Court determined that there was a proprietary interest that underpinned the restraint - H & R Block's clients, the return business/recurrent trade/goodwill. Employee was essentially hijacking H&R Block's clients. The covenant was attacked on three grounds:

1. Alleged the scope of the activity restrained was too broad. Court agreed. Court found that it was too broad because H&R Block specialised in tax returns for wage or salary earners. No reason why employee couldn't prepare tax returns for businesses etc. Shouldn't have been covering the preparation of all tax returns - but employee is a tax professional, don't want to keep a good worker out of business given his training.

2. Period of restraint was excessive. 5 year restraint was longer than reasonably necessary in order to protect H&R's interest. Wage and salary earners have to file tax returns each year. Only needed to restrain him for one year. Court was a bit more generous towards H&R and said 3 years (Paul thinks 1 year would have been sufficient).

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