Photo: Pixabay.com Free Photo
General Principles
“Restraint of trade means, where a party is restricted of his future liberty to carry on his trade, business or profession in such a manner and with such person as he chooses.” Cheshire, Fifoot and Furmston
Contracts may contain clauses that may restrict future freedom contract.
- Types of Restraint Clauses
- Contract of Employment: Employers are required not to work in a competing business or share any trade secret.
- Contract for sale of business: retiring partners may agreeto not setup a business in competition with other partnership or business.
- Solus Agreements: Seller of a product agrees with the supplier that he will obtain a product solely from him usually for a discount.
- Restraint clauses are prima facie void. But there are exceptions to this rule.
- Where business interest can be protected.
- Where there is legitimate proprietorial interest to be protected.
- The length of the time the restraint lasts.
- The geographical area the restraint covers.
It is contrary to public interest;
- By contracting a stronger party common law seeks to protect the individual from negotiating away his livelihood.
- It is not a public interest to deprive a valuable benefit by allowing a person to be restricted his lawful trade or business.
Burden of Proof
The burden of proof on reasonableness lays with the person who relies on the restraints. If the party fails to prove the substantiality and other factors (all the factors are stated below) the restraint clause will be held unenforceable.
Once the clause is shown as a reasonable clause between the parties, it must also prove that the restraint is reasonable in public interest.
Contract of Employment
The three requirements
- The restraint clause must protect the legitimate interest of the employer.
In Sir CW Leng & Co Ltd v Andrews [1909] 1 Ch 763, a junior reporter was covenanted that after leaving his employment, the employee should not connect to any newspaper within 20 miles of the city. The employer said it is necessary to protect the organization and sources of information. It was decided that these interests does not merit protection.
Hebert Morris Ltd V Saxelby [1916]
The restraint clause in his contract prevented him from working in a similar business in the UK for seven years.
Held: The restraint was on Saxelby’s own skill and knowledge, and the employer had no right to be protected from competition from a former employee using his own skill. The restraint clause was not valid.
In Forster & Sons Ltd v Suggett (1918) 35 TLR 87, the covenant was made between workers manager, who had acquired knowledge of secret-glass-making process, not engage in glass-making in anywhere within the UK was held reasonable.
Held: The restraint clause was reasonable, and it was enforceable as it protects the employer’s secret manufacturing process.
- Restraint must be reasonable in terms of subject matter, locality and time.
Let’s see another case – Fitch v Dews [1921] 2 AC 158
A covenant by a solicitor’s clerk that he would not practice within seven miles of Tamworth town hall was held to be reasonable, even though it was for an unlimited duration. The court considered that this restraint did no more than protect the legitimate interests of the solicitor, given the knowledge acquired by the clerk in respect to the clients of his former employer. On the face of things, however, this period seems excessive and the decision should be considered exceptional.
M & S Drapers (A Firm) v Reynolds [1957] 1 WLR 9
A sales representative, when taking up employment with the plaintiffs, brought with him customers from his previous employment. On joining the plaintiffs, he entered into a contract that contained a restrictive covenant which stated that on terminating his employment with the firm he would not, for the period of five years, solicit former customers on whom he had called during his employment. It was held that the clause was unenforceable in that the duration of the restraint was unreasonable. But to limit exercising a particular skill, even it was acquired during the employment.
J A Mont (UK) Ltd v Mills [1993] IRLR 173
Mills was employed for 20 years in the paper tissue industry. It was the only work he knew. (had been working for only that kind of work over time). He became the marketing manager and the managing director of the company. An agreement was made between the parties;
- He will be paid one-year salary.
- Released from working for 12 months.
- To not join another company in the paper industry within ONE year of leaving the employment.
Defendant said that the restraint clause is too wide. It applies worldwide therefore he cannot work at anyplace. In the lower court interlocutory injunction was granted stating that he may use confidential information.
Home Counties Dairies Ltd v Skilton [1970] 1 All ER 1227
Milkman agreed ‘not at any time during the period of one year after the determination of his employment . . . either on his own account or as a representative or agent of any person or company, to serve or sell milk or dairy produce to . . . any person or company’.
It includes “dairy produce” therefore butter and cheese should also include in the definition. Thus, the contract would preclude him from taking employment as a grocer’s assistant where the grocer traded in those products.
S W Strange v Mann (1965)
A bookmaker employed Mann to conduct business mainly by using the telephone. The restraint of trade clause was not to engage in a similar business within a 12-mile radius on termination of his employment.
Held: The restraint clause was invalid as Mann did not have face-to-face contact with his customers and, therefore, had no real influence on them.
Mason v Provident Clothing and Supply Co. [1913] AC 724, a canvasser not to work in a similar trade or business within 25 miles of London was decided as unreasonable because he has no control over his business.
- It must be reasonable in public interest. (It is very unlikely to hold a reasonable contract between a party to be unreasonable in the public interest.)
Wyatt v Keglinger and Fenau [1933]
The defendant promised a pension to be paid to the plaintiff, if he would not compete with him in the wool trade. After nine years of payments, the defendant refused to pay. Then the plaintiff sued the defendant where the defendant stated that the restraint was too wide and restraint was unreasonable. The Court of Appeal decided that the restraint was too wide and was contrary to the public interest.
Contract Sale of Business
Two requirements need to prove.
- Legitimate proprietary interest to be protected
- It is reasonable in the public interest
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co. [1894] AC 535
A machine gun manufacturer agreed on the sale of business that his future activities in that business shall be restricted for 25 years worldwide.
Even this restraint is very general, as previously stated such general restraints are prima facie void, the restraint was valid and binding.
There are two requirements that need to be established. First the person relying on the restraint shall establish the proprietary interest and secondly, the restraint should be reasonable in that circumstance.
Once the reasonable is to be found reasonable the claimant should prove that the restraint is not against public interest.
Public Interest
Reasonableness as regard to the public interest
Restraint of business contracts are void due to the unreasonableness with regard to the public interest are extremely uncommon.
Home Counties Dairies Ltd v Skilton [1970] 1 All ER 1227
Milkman agreed ‘not at any time during the period of one year after the determination of his employment . . . either on his own account or as a representative or agent of any person or company, to serve or sell milk or dairy produce to . . . any person or company’.
It is stated that “dairy produce” therefore butter and cheese should also included in the definition. Thus, the contract would preclude him from taking employment as a grocer’s assistant where the grocer traded in those products.
Proactive Sports Management Ltd v Rooney (2012)
The contract between was an image right agreement, which gives the power to the claimant to use his name and also only provide 20% of the image rights.
The court found that the age of the defendant was 17 at the time of the contract, and the defendant had not taken any independent advice before the contract. The restraint was to be lasted for eight years.
The judge also measured the duration of the restraint and the likely length of a football player’s profession.
Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472
In this case Harris was employed by Littlewoods and agreed as part of his contract that he would not, if he left the company, go to work for its rival Great Universal Stores (GUS) for a period of 12 months. Harris was privy to many of the strategic policy decisions behind the running of the Littlewoods mail order business and therefore had an important role. The business of Littlewoods was confined to the mail order business within the United Kingdom whilst GUS was a multinational firm whose business was wider than that of the mail order business.
The Court of Appeal held that the application of the clause should be construed so as only to apply to the UK mail order business, since this was the interest that the parties had only intended to protect even though on a literal interpretation the clause itself was very much broader than this.
This decision was not welcomed by the whole court and Browne LJ stated: ‘rewriting [the clause] so as to make enforceable that which would otherwise be unenforceable . . . I think that this is something which this court cannot do’.
Solus Agreements
Esso Petroleum v Harper’s Garage (1968)
Two solus agreements were made between Harpers and Esso. In one agreement, Harpers undertook to buy all the petrol for one garage for four and a half years in return for a discount on the price of the petrol. Agreed to open the garage for all reasonable hours. And not sell the garage without ensuring that the purchaser enters similar agreement with Esso.
In the second agreement, in return for a mortgage loan of £7,000 from Esso for another garage, Harpers agreed to purchase Esso petrol for 21 years (the period of time for the loan repayment).
Held: The first agreement was reasonable, but the second agreement was for an unreasonable length of time. It was longer than necessary to allow Esso to protect their business interests, and it was irrelevant that the length of time had been agreed in relation to a mortgage.
Severance
General Principles
Severance means removing the illegal elements of the contract, where the valid parts of the contract remain unchanged therefore enforceable. However, severance is also subject to limitations, where such severance should be consistent with the public policy that renders the contract illegal.
Requirement to exercise the severance (Blue pencil rule)
An objectionable part of a contract can be severed only where it leaves the remaining part verbally and grammatically correct and capable of standing alone.
Goldsoll v Goldman [1915] 1 Ch 292
Defendant sold his imitation jewellery business to the plaintiff, at the same time agreeing that he would not, for a period of two years, deal in real or imitation jewellery in the United Kingdom, France, the USA, Russia or within 25 miles of Potsdammerstrasse, Berlin, or St Stefans Kirche, Vienna, either on his own account or jointly. It was held by the Court of Appeal that the restraint was valid notwithstanding that the area of the restraint was too extensive.
To sever a contract for illegality under restraints illegality should not contain the main part of the contract. If a main part of the contract is removed, there could be no purpose of the contract.
Bennet v Bennet
In this case, a wife petitioned for a divorce, claiming maintenance for herself and her son.
Prior to the hearing for the decree nisi she entered a deed with her husband whereby she agreed to withdraw the application for maintenance in return for the husband paying an annuity to her and the son and, at the same time, conveying certain property to the wife.
The husband did not keep to the arrangement and was sued by the wife.
The court found that the covenant entered into by the wife not to apply for maintenance was contrary to public policy and void.
Severance of the offending covenant was considered but it was found that this played a central part in the agreement – it effectively represented the consideration for the agreement – therefore severance was not feasible. The agreement was thus held to be unenforceable and void, so that the wife could not claim the annuity.
References of the extract
- Case book on Contract Law, Jill Pool (6th Edition)
- Anson Law of Contract (29th Edition)
- Contract Law Evan McKendrick (Twelfth Edition)
- Atiya’s Introduction to the Law of Contract (Smith 6th Edition)
Contract Law Guide 