Selling a business with goodwill? Be aware of the implied prohibition and restraint of trade

When you sell a business including its “goodwill” (your business’s commercial reputation and its customer connections), the sale agreement will probably include a “restraint of trade clause”. This clause will prevent you from operating in competition with your sold business for a period of time.
The law requires restraint of trade clauses to be reasonable, so there will come a time when the restraint of trade lapses. Once this happens, you might assume that you are free to operate in that industry once again. This, however, is not entirely correct.
A High Court decision demonstrates this.
restraint of trade

A case on restraint of trade and goodwill

In this case, the buyer had happily agreed to a restraint of trade clause for a period of 5 years. After those 5 years, the owners of the company that had sold the business decided to start up again in competition with the buyer. The original owners actively canvassed their former clients. They confidently asserted that they were entitled to do so.
The Court held, however, that the restraint clause was not the only prohibition on the seller. Because the sale had included the business’s goodwill, there was an implied prohibition on the seller canvassing former clients. And this implied prohibition still stood after the 5 year period. Importantly, the Court held that this prohibition applies regardless of whether a specific restraint of trade clause is agreed upon.
The Court found that although the buyer and seller had agreed upon a 5 year restraint period, the seller remained at least partially bound after those 5 years had lapsed.

The take home message

Both sellers and buyers, be sure to word your restraint clauses carefully!
Take home message for sellers: Even if you find that there is no restraint of trade clause in your sale agreement, you are still bound by the implied prohibition against canvassing former clients if the sale includes the goodwill of your business. Prevent uncertainty and potential disputes by adding a carefully worded restraint of trade clause that specifically overrides any implied prohibitions if you ever plan to operate in the same field again.
Take home message for buyers: While the implied prohibition is in your favour, it still leaves you vulnerable in certain respects. First, only the seller is bound by the prohibition, not other key individuals. Second, the prohibition is limited in its application as to which customers it applies and what activities it actually prohibits. A restraint of trade clause is broader and provides more protection. Third, your remedy is a damages claim, not an interdict. And you may find it difficult to prove the damages you have suffered. Consult your attorney to ensure you are adequately protected with a comprehensive restraint clause.
If you require any assistance on a matter covered in this blog post, please do not hesitate to contact us at info@gunstons.com.

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