Enforceability of non-competes or restraint of trade covenants

contractRecently a US client asked me whether New Zealand Courts enforce non-compete/restraint of trade covenants (Non-Competes) against the sellers of New Zealand businesses. If New Zealand law governs the agreement, the short answer is: yes, to the extent the Non-Compete is “reasonable”. However, even where a Court finds a Non-Compete to be unreasonable, it can modify the offending provision so that it becomes reasonable.

Which Non-Competes will be seen as “reasonable” on the sale of a business?

A full discussion on this topic is a cure for insomnia! However, in brief, an enforceable Non-Compete is one that is reasonably necessary to protect the buyer’s legitimate proprietary interest.

To expand slightly: a buyer must establish the following to successfully enforce a Non-Compete:

  1. that it will actually gain a practical benefit if the Non-Compete is enforced – an example of such a benefit is that the enforcement will afford the buyer a reasonable opportunity to secure the goodwill of the business’ customers); and
  2. the Non-Compete only restrains the seller from competing:
    (a) in the specific market sector in which the acquired business operated;

    (b) in the particular geographical area in which the acquired business had trade connections – regardless of any plans for expansion the seller and/or buyer may have had in mind at the time of the sale; and

    (c) for no longer than it should take the buyer to secure the goodwill of the business’ customers.

Which market sector, geographical area and/or time period will be reasonable/right/not too restrictive will depend on all the circumstances surrounding the business being sold and the nature of the overall deal agreed.

When will a Court modify an unreasonable Non-Compete?

If a Court finds that a Non-Compete is too wide/an unreasonable restraint of trade, then it must either:

  1. decline to enforce any part of the Non-Compete; or
  2. modify it so that it is reasonable. A Court is likely to modify the Non-Compete where it believes that the modification:
    (a) is required when looking at the essential justice of the case requires it; and

    (b) can be performed without unreasonably modifying the parties’ bargain.

Please get in touch if you are a buyer or a seller and you’d like some assistance with drafting an appropriate Non-Compete or assessing the enforceability of an existing one.

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