Restraint of Trade PDF

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Restraint of trade- contract law lecture notes...

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Restraint of Trade

Learning Outcomes Define restraint of trade clauses Examine the requirement of reasonableness Understand the ‘Blue Pencil’ test Discuss the appropriate usage of restraint clauses in exclusive services/ trade contracts.

Consider the following: • You’ve got a new job! Fantastic! • Small snag… • There is a clause in your contract which says after you leave the company, for 5 years ‘you must not carry on, in any capacity, in competition with our business’. • Wait, can they do this?!

What is Restraint of Trade? • A contract in restraint of trade is one whereby a party agrees to restrict his freedom to carry out a trade, business or profession in a manner agreed with another person. • Usually, it is a clause inserted into a contract. How does this operate in the legal profession? As a general rule… Petrofina GB Ltd v Martin (1966) ‘Every member of the community is entitled to carry on any trade or business he chooses and in such a manner as he thinks most desirable in his own interests […] a contract which interferes with the free exercise of his trade or business is a contract in restraint of trade. It is invalid unless it is reasonable as between the parties’ – Lord Denning

So, a restraint of trade clause must be REASONABLE to be valid.Where might we find restraint clauses? Two conflicting doctrines here! Freedom to contract • isn’t an employer justified to protect their IP rights, client database or know how? Freedom without restraint • is it unreasonable to have a restriction on an employee or in a sale? Leading Authority Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co (1894) • Owner of an arms business sold it to another company. • Covenanted not to trade in such a business for 25 years, except on behalf of the company. • Essentially – would refrain from engaging in manufacture of guns/ ammo or anything to do with

guns/ ammo in a business likely to compete with them in any way.

‘Covenant’ • Covenant is an agreement between two individuals to do or refrain from doing something. • The individual making the promise or agreement is known as the covenantor, and the individual to whom such promise is made is called the covenanteeBack to Nordenfelt… • Covenant was valid. • Established 2 principles: – Covenants in restraint of trade are prima facie void because they are against public policy, UNLESS THEY ARE REASONABLE. – May be valid if it protects a legitimate interest of the person imposing it, the other party and the public. • It is up to the party imposing the restraint to show it is reasonable. Why have restraints? Valid restraints are allowed so that a business or employer can protect their proprietary interest (meaning their property rights, either tangible or intangible). These were identified in Herbert Morris Ltd v Saxelby (1916) as: – The goodwill of a business (which would include trade connections with suppliers and customers) – usually in contracts for sale of a business) – Client or trade secrets - usually in employee’s restraints. 1. Business Connection Saw this first element in Nordenfelt v Maxim Nordenfelt. Contrast Vancouver Malt and Sake Brewing Co v Vancouver Breweries (1934) • VB bought VM’s brewing license for $15,000 and made them promise not to brew beer for 15 years. VM never brewed anything other than sake. • Restraint void. 2. Trade Secrets Forster v Suggett (1918) • C company and D entered into an agreement under which the D was to be employed as a works engineer at C’s works. • Was not to divulge any trade secrets during his employment, and not to engage in glassmaking anywhere within the UK for 5 years. • Reasonable as he had been instructed in secret processes and the employer’s business extended nationally. 3. Exclusive Service Contracts Where someone agrees to work solely for one employer for a fixed period of time. Common in the music industry. Schroeder Music Publishing Co v Macauley (1974) • Macauley, a songwriter, contracted with a publisher to hand over his music compositions for 5 years with no guarantee his work would be published. • Bound for a further 5 years if his royalties exceeded £5,000. • Unequal bargaining power, so restraint unreasonable and too restrictive.

Panayiotou v Sony Music Entertainment (1994) • C was George Michael, entered into an agreement with the company in 1984. In 1988, was taken over by Sony, and the contract renegotiated including restraint of trade. In 1991, GM

became dissatisfied and sought to have the 1988 contract declared void. • No restraint – company had a legitimate interest to protect and no improper pressure placed. Had benefit of good advice. Proactive Sports Management Ltd V Rooney (2011) • Wayne Rooney set up a company to exploit his image for 8 years (FA recommends 2 years). Company hired PS. • Rooney fell out with PS and sought to claim the contract was restrictive and oppressive. • WR was 17 years old at the time; had no independent legal advice and none was offered by PS. • Held: agreement oppressive and unreasonable.

Esso Petroleum v Harper’s Garage (1967) • Example of a Solus agreement • H entered into an agreement with E to supply their petrol for 2 garages. – 1. one for 4 years and 5 months – 2. one for 21 years in return for a mortgage which was irredeemable during that period. Prima facie void; it was up to Esso now to prove their reasonableness. 1st one reasonable as it protects their interest. 2nd invalid – went beyond what was necessary. Requirements for Reasonableness Reasonableness 1. Area of restraint 2. Duration of restraint 3. Activities caught by clause 1. Area of Restraint The restraint must not be more extensive than is necessary to protect the interests. Mason v Provident Clothing and Supply Co (1913) • A canvasser covenanted not to work within 25 miles of London for 3 years in a similar trade. • Unreasonable – too wide, given the limited sphere of influence in his employment. 2. Duration (time period of restraint) Trade secrets and protection of customers lose importance over time. However, unlimited restraints can be upheld in appropriate cases: Fitch v Dewes (1921) • A young Solicitor’s Clerk promised not to work as a solicitor within 7 miles of Tamworth town hall. This constraint was indefinite. • Held: reasonable in view of client’s interests and public interest. 3. Activities Caught (Scope of Restraint) Must do no more than protect legitimate interest of person. Attwood v Lamont (1920) • Chief cutter and manager in general outfitters promised not to be involved in any type of tailoring (including dressmaker, hatter, haberdasher, children’s outfitter etc.) within 10 miles of

the shop. • Way too wide! Clause unenforceable. Home Counties Dairies Ltd v Skilton (1970) • Milkman covenanted not to sell or get orders for ‘milk or dairy produce’ from any customer of his former employer for 1 year. • Is this too wide? Would this have prevented the party from taking employment as a grocer’s assistant if he had to sell butter and cheese? • Court said no, the clause was reasonable! Interpreted ‘dairy produce’ as the type that milkmen would normally deal with. Severance [The Blue Pencil Test] This is where the court can delete onerous words and phrases within a clause to make it more reasonable. However, the clause must make sense after the deletions. Words cannot be written in: the clause cannot be re -written WORDS CAN ONLY BE REMOVED. Severance in action Goldsoll v Goldman (1915) • Clause: for a period of 2 years he would not, either solely or jointly, deal in real or imitation jewellery in any part of the United Kingdom, France, USA, Russia or Spain, or within 25 miles of Berlin or Vienna. • Too wide! Can we sharpen our blue pencil and cross out the illegal bits? Goldsoll v Goldman (1915) For a period of two years he would not, either solely or jointly, deal in real or imitation jewellery in any part of the United Kingdom, or France, USA, Russia or Spain or within twenty five miles of Berlin or Vienna.Severance must not alter the agreement Attwood v Lamont • Not to be involved in ”the trade or business of tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentleman’s, ladies or children’s outfitter at any place within a radius of 10 miles of the employer’s business.” • Too wide! Can we sharpen our blue pencil? The Divisional Court tried to… Not to be involved in ”the trade or business of tailor, dressmaker, general draper, milliner, hatter, haberdasher, gentleman’s, ladies or children’s outfitter at any place within a radius of 10 miles of the employer’s business.” • C/A didn’t like this. • Severance wasn’t allowed because the clause was aimed not at protecting one department, but the whole business. • Severance would alter the meaning. • So they had to declare the whole clause void.

Summary • Always ask – is this clause valid?

• Consider: does it protect business interests, or trade secrets? • Is in an exclusive trading contract? • Is it reasonable in terms of area, time and activities? If not, will severance work?...