Contracts in restraint of trade vitiate a contract (vitiating factors is something that makes the contract less than perfect.) they fall under the general heading of illegality.
A contract can be illegal in many ways, one such way is that it is illegal on the grounds of public policy. Public policy is difficult to define but essentially it assumes that there are some interests which are shared by most of society and should be protected. For example society would in the main would be harmful if the law tolerated contracts to commit crimes.
Everet v Williams
The courts refused to uphold a contract between 2 highwaymen to share the proceeds of their crime.
Contracts in restraint of trade is a frequent area of litigation dealing with any contract which restricts the freedom of a person to carry out their trade, business or profession in a manner of their choosing. Such contracts fall into 4 groups.
1) contracts in which an employee agrees upon leaving the company they will not set up on business or be employed in such a way as to compete with that employer
2) Contracts for the sale of business where the vendor (seller) promises not to compete with the purchaser.
3) Contracts between businesses by which prices/output are regulated
4) SOLUS agreements - contracts where a person agrees to restrict their mode of trade by for example only accepting orders from one particular company.
Such a contract is deemed illegal as against public policy interest unless it is justifiable as being reasonable. The modern law on restraint of trade is found in the following case.
Nordenfeldt v maxim Nordenfeldt Guns and Ammunition
The owner of an arms business sold it to a company and greed not to trade in such a business for 25 years except on behalf of the company anywhere in the world. The agreement was held to be valid given the exclusive nature of the business.
Contracts in restraint of trade are prima facie (face value) are void as being contrary to public policy unless the party wishing to include it can show…
1) it protects a legitimate interest
Herbert Morris ltd v Saxelby
Lord Shaw identified a number of situations that were reasonable in protecting the legitimate interest in the person seeking the restraint clause.
i.e. in contracts for the sale of a business it is clearly proper for the purchaser to restrain the vendor from acting in competition with the business he is purchasing.
In contracts of employment on an employer cannot prevent a former employee from acting in competition with him but is able to prevent the former employee making use of secrets acquired during the period of employment or poaching his former employers customers.
2) it is not harmful to the public interest
The court will strike out any clause, which is harmful to the public good
Wyatt v Kreglinger and Fernau
A wool brokers employer promised that he would pay him a pension, provided that he did not seek employment further employment in the wool trade and did not do anything detrimental to the employers interest. The broker received the pension benefits but left sometime after for a different employer. It was held that the employer could not recover theses payments back given that this and the stipulation against competition was contrary to public interest.
3) Restraint must be reasonable
Factors affecting reasonableness
a) regarding restraints on former employees
The restriction will be reasonable if:
i) it protects trade secrets of the former employer
Forster v Suggett
A restriction on a managers freedom to work in the manufacture of glass, for 5 years after the end of a particular employment, was held to be valid, given the manufacture involved a secret process.
ii) it protects a client base (prevents poaching)
Fitch v Dewes
A solicitor's clerk was prevented from working within a 7 mile radius of Tamworth town hall. This was held to be reasonable given the nature of the practice and the number of potential clients.
Mason v Provident Clothing
A trade canvasser who sold clothes to trade outlets was restrained from working in a similar capacity within a 25 mile radius of London. This was held to be too wide given the nature of the work and the dense population of the area.
iii) the restraint is not excessive as regards its area
Fitch v Dewes - A 7 mile radius was deemed reasonable for a solicitor clerk
Mason v Provident Clothing - 25 mile radius of London was unreasonable
Marley Tile Co. Ltd v Johnson
Marley tried to stop a former rep from establishing a tile business within any area he had worked during the 12 months prior to him leaving the company. This area included Devon and Cornwall. Held the area was far too wide and therefore void for being unreasonable. The court said a small businessman setting up in a small Cornish town was no threat for a large national company.
iv) the restraint is not excessive as regards its duration
It is clear that an employee connection with his former employers customers must wane after time.
Home Counties Dairies v Skilton
The court upheld a restraint on a milkman not to sell milk to any former customers of his former employer for 6 months.
*Compare*
Fitch v Dewes - Ban was for an unlimited period of time given the nature of a solicitors work so could still poach clients after many years. (Excessive + Exceptional?)
v) The restraint does not extend to an activity which is irrelevant to the interest to be protected
Attwood v Lamont
Attwood carried out his business as a general outfitter in Kidderminster. His store had several departments and Lamont was head of the tailoring department, he signed a restraint clause which sought to prevent him working as a tailor, dressmaker, draper, milliner, haberdasher, children's outfitter within 10 miles of Kidderminster. Held restraint was too wide in relation to the activity restrained.
vi) Inducement (a restraint that is freely negotiated and done for financial reward by an employee who is not particularly vulnerable)
Allied Dunbar v Weisinger
An employee agreed not to work in the field of insurance for 2 years following his current employment in return he would receive two years additional salary by way of compensation. The court upheld this restraint.
b) restraints in a contract for the sale of a business
Herbert Morris Ltd v Saxelby (1916)
Lord Shaw said that it is clearly proper for the purchaser to restrain the vendor from entering into competition with the business he is purchasing.
i.e. where a person buys a business and then seeks to restrain the seller from setting up in a similar business close by. The reasoning here is that buyers would not be forthcoming if they could not have protection against unfair competition from the seller. Such a restraint is valid if it is connected with the proprietary interest being sold.
British Reinforced Concrete Engineering v Schelff (1921)
A large national company making road reinforcements took over the business of a small company specialising in the selling of loop road reinforcements. It contained a clause restricting the smaller company from establishing a new business within 10 miles of any branch of the organisation. Held the restriction was void because it did not protect the proprietary interest o the larger company. The small company specialising in loop road reinforcements was no threat to the much larger business who sold road reinforcements in general.
c) Restrictive dealing/SOLUS agreements
i.e. sometimes an individual agrees to work for only 1 employer or to sell only the manufacturers product. Such solus agreements are valid if reasonable.
Esso v Harper's garage (1968)
A garage owner entered into separate contracts in relation to the 2 garages he owned. Each involved the purchase of petrol from Esso. One was for 4 years 6 months and the other for 21 years, with an undertaking not to sell either to a purchaser unless they entered into similar covenants. Held the 21 year agreement was unreasonable as it attempted to look to far into the future so void but the other contract was deemed reasonable.
*NB - under EU law the guideline is now a restriction for up to 10 years is reasonable.
Clearly in contracts of this nature the courts consider several things
· There must be an interest meriting protection
· The agreement must be reasonable in relation to the interest
· The agreement must not be contrary to the public interest
A similar but contrasting case is:
Alec Lobb Garages Ltd v Total Oil
The plaintiff was in dire financial straights. In return for financial help the Lobbs agreed to buy all their petrol from Total Oil for 7 - 21 years. Latter the Lobbs argued the agreement was void as being in restraint of trade. Held it was valid because it was reasonable as it was a rescue enterprise which benefited the Lobbs, it was in the public interest as transactions like these should be encouraged as it allowed an individual to carry on trading.
Restrictive Practices Act 1976
A wide range of agreements which are likely to restrict competition must be registered with the DG of Fair trading who is then required to refer them to the restrictive practices court. If the court determines them to be contrary to public interest they are void.
Similar tests are applied to contracts compelling an individual to work for only one employer.
Schroder Music v Macculey (1974)
Macculey a then unknown music songwriter entered into a very one-sided contract favouring the music company. He had to hand over all his compositions, 5 year contract which was at the publishers discretion to extend to 10, yet the publisher wasn't obliged to promote his compositions. Held void because unreasonable.
Panayiotou v Sony music Entertainment Ltd (1994)
A long term contract was entered into by George Michael. Held sony had a legitimate interest to protect in that it wished to sell as many records as possible and that given the circumstances of the case the restrictions on the performer were reasonable, i.e. he had the benefit of professional legal advice and also was given £10 million.
The effect of a clause in restraint of trade
i) The clause itself is void, or unenforceable if against public policy and not proved reasonable.
ii) The whole contract is not necessarily void because severance may be possible.
Severance or the 'blue pencil rule' as it is sometimes known allows the court to delete an unfair restriction provided the nature of the contract is not altered and still makes sense.
Goldsoll v Goldman (1915)
In the sale of a business specialising in the sale of imitation jewellery in the UK the buyer sought to include a clause restraining the seller from engaging in real or imitation jewellery across the UK, EU, and the USA. Held the scope was to wide i.e. the business only concerned imitation jewellery and was limited to the UK. the court decided to narrow the scope of the restriction by simply the deleting the words 'real or' and the reference to Europe and the USA.
But severance must take place without destroying the nature of the contract.
Attwood v Lamont
A covenant protecting the business of a general outfitter by restraining a tailor employed in the tailoring department from working in any field associated with the outfitters business. The courts deemed this was not possible to severe because to do so would alter the nature of the contract, as the outfitter wanted all of his business to be protected not just the tailoring department.
Recent cases suggest that severance provisions may not be necessary
The current approach is that widely phrased restriction should be interpreted within the factual context in which they had been put forward.
Littlewoods v Harris (1978)
An employee worked solely in the plaintiffs mail order business. The plaintiffs sought to enforce a restraint, which covered his wide ranging business. Held the clause should be interpreted only to cover the mail order business.
Similarly
Clarke v Newland (1991)
A broad agreement by a GP 'not to practice' was held to mean as a GP, rather than for example a hospital doctor, since this was the role in which the defendant had previously been employed.
iii) An action may lie against the maker of the clause for contravening Article 85 of the Treaty of Rome, which makes void any practices adversely affecting competition within the EU