Restrictive Covenants in Business Sales: Enforcement Trends

The enforcement of restrictive covenants in the context of business sales continues to generate significant litigation. While the courts have traditionally been more willing to enforce covenants in sale agreements than in employment contracts — on the basis that the parties are of equal bargaining power — recent decisions suggest a more nuanced approach is emerging.

Several recent cases have examined whether restrictive covenants in share purchase agreements are proportionate to the legitimate interest being protected, particularly where the vendor's involvement in the business was limited to a strategic or investment role rather than day-to-day operations.

Marcus Webb, Consultant at Caldwell Advisory, stated: "Vendors are increasingly testing the boundaries of restrictive covenants after business sales, particularly where the covenant period exceeds two years or the geographic scope is poorly defined."

The key principles remain that the covenant must protect a legitimate business interest, be no wider than reasonably necessary, and be supported by adequate consideration. However, the application of these principles to specific factual scenarios continues to evolve, and parties should ensure that covenants are tailored to the particular transaction rather than adopted from precedent without adaptation.