Reconstructing Restraint of Trade

Abstract

This essay re-examines the central foundations of the common law doctrine of restraint of trade. It advances four main arguments. First, there is a role for a scope test in restraint of trade law. The test’s function is to identify — and thus subject to review — contractual obligations in which one or (preferably) more of three features exist: (a) the obligation is onerous; (b) there was a significant risk of cognitive error in the framing of the obligation; (c) the parties’ self-interest was a weak safeguard against unreasonableness. Second, contracting parties may legitimately use restraints to protect investments necessary for the viability of a ‘positive’ endeavour. Third, substantive and procedural fairness, whether considered separately or together under the rubric of ‘inequality of bargaining power’, are strictly irrelevant to restraint of trade law — although a few specific procedural considerations have a limited evidentiary value and, in addition, there are independent reasons for caring about the substantive fairness of restrictive agreements. Finally, the public interest test should be eliminated. The stripped-down version of restraint of trade law which emerges from these recommendations is justified on first principles, internally consistent, and distinct from other legal doctrines. The reconstructed doctrine does not eliminate the difficult factual questions raised by restrictive covenants, but by focusing judicial attention on the proper concerns of restraint of trade law, it leaves judges in a better position to address these questions.

Keywords: restraint of trade, restrictive covenants, contract law

JEL Classification: K10, K12