When you buy a business, think about whether the goodwill you are paying for will be damaged if the seller starts up a new business in competition with you. If so, a “restraint of trade” clause is essential, but beware – it must be properly drawn to be valid. Our courts will not enforce any restraint that is unreasonably wide in nature, geographical area, or duration.
Having said that, as a recent High Court case shows, even a widely-worded restraint clause can still be perfectly valid. The clause in question restricted the seller of an Italian-style restaurant from carrying on any similar business, and in particular provided that she could not compete with the buyer “in any form of Restaurant / Coffee Shop Business” for 3 years.
The seller then opened up a sushi bar nearby, arguing that it did not compete with the original restaurant, being Japanese rather than Italian, and being largely take-away rather than sit-down in style. Unimpressed by these arguments, the Court interdicted the seller from continuing to run her sushi bar – which, held the Court, “still operates as a restaurant” regardless of the differences in cuisine and style. Nor was it relevant that the buyer of the Italian restaurant had changed its name, menu and décor – despite the changes it remained “a restaurant business”.
Every case will be different – reduce the risk of dispute and costly litigation (there is talk of an appeal now in the case in question) by ensuring that both parties are clear on what they are agreeing to, and by insisting on a properly-drawn agreement that is tailored to fit the particular circumstances of your sale.