Published on 20/05/2007

Please note the download link for these set of notes are at the end of page 3 (Additional Notes - Restraint of Trade)

Discharge by Agreement

Parties to a contract can agree to discharge the contract that they have entered into, thereby releasing each other from unperformed obligations to that contract.

Where the parties agree to terminate a contract prior to performance, the mutual promise to release the other from obligations and not sue each other constitutes consideration.

The discharging agreement must fall under all the requirements for a valid contract. There are two types of discharge by agreements, they include:

Discharge of Executory Contracts

Discharge of a contract that has not been completely performed or executed by either party

Where a contract that is not required to be evidenced by writing any variation of the terms of the contract may be made by a purely oral agreements. However, where there is such a requirement the variation must also be so evidenced because the writing must contain all the terms.

The consequence of an oral discharging agreement will depend upon whether it simply:

    * Discharges the original contract:

An agreement to rescind the contract discharges the parties from the duty to perform their contractual obligations.

    * Discharges it and at the same time replaces it with another agreement between the parties:

If the obligations are replaced with new obligations, in which case that contract will probably be evidenced in writing. A contract terminating a prior agreement does not have to be in writing, even if the original contract was in writing.

    * Varies the original contract:

A variation to the contract will require evidence in writing, the contract may be validly rescinded by an oral agreement.

It was held in Morris v Baron & Co, per Viscount Haldane that an original contract must amount to a complete recision which should be the intention of both parties and not a mere desire of an alteration. The view that a minor contractual variation as the rescission of the prior contract and the submission of a new contract was rejected in this case.

However, in United Dominions Corp (Jamaica) Ltd v Shoucair it was stated that a variation did not rescind the original contract of the interest rate payable on a loan. It was held not to extinguish the prior debt and mortgage agreement.

Also, it was seen in Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd, that if the parties agreement for rescission is contingent on the substitution of a new and enforceable contract, the rescission will not take effect if the subsequent agreement is unenforceable by reasons of a statutory requirement of writing.

Discharge of Executed Contracts

Mc Dermott v Black (1940) - Discharge of a contract where one party has completed performed or executed its obligations and the other has not.

A problem arises in respect of a contract to terminate an agreement where one of the parties has already performed their obligations. Such a party is not being release from any remaining duties to perform, so the other party cannot rely on that promise as consideration. To overcome this problem, contracts of discharge are often recorded in deeds of release Foakes v Beer (1884)

Discharge by Frustration

The emergence of the doctrine of frustration has provided that parties are excused from performance if supervening events dramatically affects the nature of the contract Taylor v Caldwell

OR

If, after the formation of a contract, an event occurs with the effect of rendering performance more onerous, less valuable, or impossible, a party may argue that the contract has been frustrated.

Elements of Frustration

What are the elements that you need to establish for a contract to be frustrated?

In National Carriers Ltd v Panalpina (Northern) Ltd [1981], Lord Simon listed the following elements of frustration:

- There must be a supervening event that "significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights";
- There must be no fault in either party;
- The supervening event must not have been "reasonably contemplated by the parties" at the time of the contract;
- It must be unjust to hold the parties to the original contract.

2.0 Instances of Frustration

Impossibility of Performance

       * Destruction of the physical subject matter

The doctrine of frustration first emerged in cases where specific matter had been destroyed without the fault of either party. This is seen in,

Taylor v Caldwell

Facts: The defendants agreed to allow the plaintiff to use a Hall for a certain period (4 Days) for the purpose of concerts and fetes. The hall was destroyed.
Issue: Was the Hall the subject matter of the contract?
Held: The court held that the contract was discharged by this event, as the Hall was essential to the performance of the contract. The subject matter (Hall) must be essential to the performance of the contract

       * Death or incapacity of person in personal services contract

When the performance of a contract has a personal element, death or incapacity it may frustrate its performance. This is seen in,

Simmons Ltd v Hay (1964)

A printery engineer was permanently incapacitated by illness, so that he was not able to discharged his contractual duties, and the contract of employment was frustrated.

       * Supervening legal impossibility

Frustration involved the element of impossibility. Where performance by either or both of the parties is physically impossible. For example, if there is a change in law that makes the contract illegal. The illegality must go to the root of the contract – if the law just makes the contract more onerous then it still goes ahead. For example, in

Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944]

Facts: A trading agreement provided, inter alia, for the purchase of pinewood. An order was made by the Defence Regulations (UK) which made it illegal to sell pine wood at a certain price and a later order prevented importation of the timber.
Held: The house of Lords held that as the trading of timber was the “main object” of the contract, it was frustrated once trading became illegal.

Frustration of Purpose

       * Non-occurrence of an event, which is the basis of the contract.

Frustration of the contract purpose was established in the principles of,

Krell v Henry (1903)

Fatcs: The plaintiff hired a room for the purpose to view the coronation and parade for Edward VII. However, the parade was cancelled and the court held that this frustrated the contract.
Held: The basis for the decision was that the parade was “regarded by both contracting parties as the foundation of the contract”.

       * Event cannot be caused by the parties to the contract (Self-induced Frustration)

Frustration may be regarded as self-induced by reason of default arising from an act or omission by a party, in which the self-induced act cannot frustrate the contract.

One cannot instigate an event and claim a contract is frustrated. A party to the contract must prove that a self-induced frustration occurred to prevent the contract being frustrated. This is seen in,

Joseph Constantine Steamship Line v Imperial Smelting Corp

The House of Lords held that the onus is on the party who makes the allegation that frustration was self-induced. In that case a vessel the subject of a charter party was damaged by an explosion, which rendered it impossible for the vessel to perform under the charter party. The cause of the explosion could not be established, and the owners were able to invoke the doctrine of frustration because the charterers could not establish that the explosion occurred by reason of the owner’s default.

The upshot of this case is that a party is not disentitle to rely on the doctrine by the mere possibility that the event alleged to frustrate the contract occurred as a result of its default.

Effects of Frustration (At common law)

At common law frustration automatically discharges the parties as to future obligations under the contract, but pre-frustration obligations are still enforceable.

The obligations that arose before the frustrating event are enforceable as seen in Chandler v Webster

However, this notion was overruled whereby the impact of frustration causes a total failure in consideration then the payer will be entitled to restitution before the frustrating event occurred. This was established in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour.

The House of Lords held that “the payment was a conditional payment on account of the price of the machinery there was a total failure of consideration and restitution was ordered.”

Effects of Frustration (Under Statute)

The Frustrated Contracts Act 1978 (NSW) was enacted to overcome the defects of the common law in regards to deposits paid before the contract becomes frustrated and there is a total failure of consideration.

Frustrated Contracts Act 1978 (NSW)

The first thing to note about the Act is that it does not apply to all contracts.
Under S.6 the Act does not apply to:

- A contract mad before 1 May 1979
- A charter party
- Carriage of goods by sea
- Insurance
- Contracts that the parties agree this Act is not to apply.

S.7
A promise that was to have been performed before frustration but was not so performed, is discharged, except to the extent that it is necessary to support a claim for damages brought by the other party for breach of contract.

S.8
Assessing damages in such a case the court must have regard to the fact that the contract has been frustrated.

S.10
Situations where one party has fully performed its obligation prior to frustration, the liability of the other party with respect to that performance. This section provides for payment, to the party who performed, of an amount equal to the “value of the agreed return for the performance”. Section 10 does not apply to situations where the obligation performed prior to frustration involves, in whole or in part, the payment of money: s. 9.

S.11
Where one party has partially performed its obligation prior to frustration, the liability of the other party is dealt with in s. 11. The section sets out a complex formula by which the compensation payable to the first party is calculated. Again s. 11 does not apply to situations where the obligation performed prior to frustration involves, in whole or in part, the payment of money: s. 9.

S.12
Deals with the situation where the obligation performed prior to frustration involves the payment of money. The section stipulates that such payments are to be returned to the other party, provided that the money paid by the first party was paid as consideration for performance by the other party.

S.13
Deals with the situation illustrated by the Fibrosa case, namely where expenditure has been incurred by one party prior to frustration and that expenditure is effectively wasted as a result of frustration. In such cases that amount of the wasted expenditure is equally apportioned between the parties.
If something can be salvaged from the partially completed work by the first party, then that too is equally apportioned between the parties.

S.15
Finally, it must be noted that the provisions set out in ss. 9-13 can be excluded by a court order if applying the provisions would be manifestly inadequate or inappropriate, or would cause a manifest injustice, or would be excessively difficult to apply. In such cases, by s. 15, the court can make orders in the form of money payments or otherwise as it considers proper.

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Illegal & Void Contracts

Contracts can be called into question because their object is one, which the law does not wish to enforce. Such contracts can be declared to be either illegal or void

A contract may be illegal because it is prohibited by statute, or because it infringes a rule public policy.

Illegal Contracts

Contract can be declared illegal either pursuant to statute or common law principles.

     * Statutory Illegality

A contract can be prohibited by a statute depending on the intention of the legislature as expressed in the statute and principles governing the interpretation of statues must be applied - Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978)

Two types of contract can be declared illegal by statute:

In St John Shipping Corp v Joseph Rank Ltd, Devlin J stated, as a general principle, that a court “will not enforce a contract, which is expressly or impliedly prohibited by statute”.

   1. Expressly illegality.

A statute explicitly states that contract entered into, in violation of the statute are illegal.

Re Mahmoud and Ispahani, in this case the defendant didn’t have a license although he said that he had it. The contract was express illegality.

   2. Implied illegality.

Implied illegality occurs when legislation prescribes certain conduct and imposes certain penalties for violating that legislation. This was seen in,

Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978)

Whereby, s8 of the Banking Act 1950 was contravened by the plaintiff, in which a penalty was imposed.

This was also seen in, St John Shipping Corp v Joseph Rank Ltd,

Whereby a freight company had contravened the Merchant Shipping Act by overloading the vessel. They were penalised but the main theme of this case on statutory illegality is that the court should not find an implied prohibition if this would lead to an unreasonable or inconvenient result, or to an absurd conclusion.

     * Common law Illegality

1. Any contract that has as its purpose the commission of a crime. Tort or fraud on a third person is illegal. Such as unlawfully trading, which is seen in Neal v Ayers.

2. A contract that is sexually immoral is illegal. What is “sexually immoral”?

In Seidler v Schallhofer, Hope JA held that the “agreement did not involve meretricious sexual services, but a sexual relationship as part of a wider relationship”. It would be wrong to hold the present agreement contrary to public policy.

3. Contracts which prejudice public safety or good relations with other states (ie contracts with countries at war with Australia)

4.Contracts that are prejudicial to the administration of justice.

In the cases of Callaghan v O’Sullivan and Clegg v Wilson the contracts made were contrary to public policy, which in this case was the payment of money to not prosecute the plaintiff, and money could not be recovered.

5. Contracts tending to promote corruption in public life.

This is seen in, Wilkinson v Osbourne whereby the contract was contrary to public policy because of the clear conflict of interest and duty of a member from the legislative assembly.

6. Contracts to defraud the revenue.

This concept was seen in Alexander v Rayson, whereby the Court held that because the plaintiff had prepared the documents in order to commit a legal wrong he could not enforce the lease.

He wasn’t entitled to enforce the contract, since the foundation was a device for the achieving of a purpose that was illegal, immoral or contrary to public policy.

Effects of Illegality

If both parties intend to commit an illegal act or act in a manner contrary to public policy neither party can bring an action pursuant to the illegal contract.

If only one party is guilty of performance of an otherwise legal contract in an illegal manner or for an illegal purpose, the other can sue on the contract. This notion is seen in Archibolds (Freightage) Ltd v S Spanglett Ltd.

However, even if contract is illegal as to its formation, an innocent party may have alternative remedies, not based upon the contract. Possible alternatives include:

1.Tort of deceit (Fraud)

This is seen in Hatcher v White, whereby the contract was based on a fraudulent misrepresentation by the builder. The plaintiff was awarded damages based on the performance of the contract and not the formation of the contract.

2. Collateral Contracts

Where a person may require a licence that licence does not exist (they have said they are licensed when in fact they are not) and there is an implied illegality rendering that contract unenforceable.

However, if there was a promise that a party was licensed, that assurance may be a separate and distinct contract and the consideration for that contract is the entry into the main contract. This is seen in,

Strongman v Sincock

Although the illegality made the contract unenforceable, Strongman could recover for breach of the collateral promise, since there was no culpable negligence on its part relying upon it.

3.Equitable Estoppel

Where a person has made an assurance that they are licensed when in fact they are not you may have a ground under promissory estoppel. (Refer to estoppel notes)

Severance

In some circumstances the illegality can be severed from the contract.

There are two main forms of severance:

1. A term of a contract which is itself invalid may be severable form the rest of the contract.

2. If a term is partially invalid and the invalid part can be severed so as to permit enforcement of the remainder of the term.

It is, however, clear from the High Court’s decision in Thomas Brown & Sons Ltd v Fazal Deen that severance of an illegal contract is sometimes possible.

Facts: The plaintiff had deposited a quantity of gold with the defendants in contravention of the National Security Regulations. In addition, the plaintiff also deposited a quantity of gems, which did not contravene the legislation.
Held: The Courts severed the bailment contract and permitted the enforcement of the contractual obligations in regards to the gems. This suggest that the plaintiff could demand the return of other part of the property bailed, the bailment of the gems was in effect distinct form the bailment of gold.

Recovery of money or property transferred under an illegal contract.

Generally, courts will not assist either party to an illegal contract to recover property that has passed pursuant to it. Exceptions here include:

1. The principle of Locus Poenitentiae

Principle – Locus Poenitentiae – means literally is “place or chance of repentance”

If the person withdraws or repents from their illegality then you can recover property that may have passed pursuant to that contract. The illegal act(s) must not have been carried out or at least in substance not carried out at the time the person withdraws from the illegality of the contract.

Only relevant to common law illegality – not statute illegality.

The relevant case that establishes this notion is seen in Clegg v Wilson.The repentance or withdrawal does not have to be genuine or sincere – it must be voluntary.

Facts: Mrs Clegg agreed to transfer her house ‘fairlawn’ at Turramurra to Wilson, in return for his refraining from giving evidence in a prosecution against her son, a solicitor. However, the charge was withdrawn for other reasons, and Mrs Clegg sought to have the agreement set aside.
Held: The sup court of NSW held that she was entitled to relief. An agreement to stifle a prosecution was against public policy and was illegal, but equity would undo the transaction while the illegal purpose remained wholly executory notwithstanding that there was an element of turpitude in the contract and both parties were in pari delicto.

*Turpitude: Everything done contrary to justice, honesty, modesty or good morals

2. If the parties are NOT in pari delicto

If the parties are NOT in pari delicto, they are not both guilty or equally guilty of an illegality or illegal intent OR the absence of knowledge of the illegality. Then they can recover property.

Thus, in Archbolds (Freightage) Ltd v S Spanglett Ltd the plaintiff recovered damages even though the defendants had contravened an Act but not knowing this fact the plaintiff was not in pari delicto.

3.A party has alternative grounds for recovery such as in the law of torts.

Plaintiff may be able to recover property based on some independent cause of action that has nothing to do with the contract. Mainly tort principles such as tort of conversion.

*conversion is a tort that deals with the wrongful interference with goods

The Bowmakers principle concerning recovery of property is derived from the decision of the English Court of Appeal in, Bowmakers Ltd v Barnet Instruments Ltd.

Facts: Barnet obtained possession of machine tools under hire-purchase agreements with Bowmakers, who purchase them from Smith. Unknown to all the parties, the transactions were prohibited by orders under Defence regulations. Barnet did not pay all the monthly payments of hire and sold the tools or refused to deliver them up. Bowmakers sued for damages for conversion. Judgement for Bowmakers, Barnet appealed.
Issue: Whether Bowmakers was entitled to sue for conversion of the goods?
Held: Appeal dismissed. Bowmakers succeeded.

A man’s right to possess his own chattels (personal property) will as a general rule be enforced against one who, without any claim of right, is detaining them or has converted them to his own use, even though it may appear either from the pleadings or in the course of the trial that the chattels in question came into the defendant’s possession by reason of an illegal contract between himself and the plaintiff, provided that the plaintiff does not seek, and is not forced, either to found his claim on the illegal contract or to plead its illegality in order to support the claim.

Du Parcq: “Prima facie a man is entitled to his own property, and it is not a general principle of our law (as was suggested) that when one man’s goods have got into another’s possession in consequence of some unlawful dealings between them, the true owner can never be allowed to recover those goods by an action. The necessity of such a principle to the interest and advancement of public policy is certainly not obvious. The suggestion that it exists is not, in our opinion, supported by authority”

In Singh v Ali, the plaintiff relied upon the cause of action that a person in possession of goods, or entitled to their immediate possession, has the right to recover damages for trespass against a person who unlawfully interferes with the goods by taking them out of the possession of the person legally in possession of the goods.

Void Contracts

The three major areas in which common law principles will declare a contract as being void are dealt with below. Generally, property that may have passed under a void contract can be recovered.

1. Contracts to Oust the Jurisdiction of the Court are Void

Although a contract, which purports to oust the jurisdiction of the courts, is probably not illegal, it is contrary to public policy and therefore void or unenforceable.

A contract or provision ousting the jurisdiction of the courts to hear disputes is void. Nevertheless in, Scott v Avery (1856) the House of Lords decided that an arbitration clause of this type does not infringe public policy even if it enables the arbitrator to determine whether any liability has been incurred under the contract.

2. Contracts Prejudicial to the status of Marriage are void

A contract that unduly restrains the freedom of a person to marry is void.

3. Contracts in Restraint of Trade

A contract, or term in a contract, in restraint of trade is one, which restricts the right of a person to freely carry on his or her trade, business or profession. The purpose of such restraints is stated in Lindner v Murdock's Garage (1950):

It is common to use the expression covenants in restraint of trade, with the covenantor being the person burdened by the covenant and the covenantee being the person for whose benefit the provision applies.

At common law such restraints are prima facie void and unenforceable. The fact that a restraint clause has been freely bargained for and entered into by the parties does not mean that the restraint is enforceable. This point was made in Maggbury P/L v Hafele Australia P/L, whereby restraints of trade are likely to reduce competition.

“ The importance of competition for the economy…That this is so should be taken into account in formulating and apply any contemporary doctrine eof restraint of trade”
However if the restraint is reasonable then the prima facie rule will not apply.

A restraint of trade contained in a deed in which the covenantee has not provided consideration, is not enforceable by the covenantee. Even in a deed form the consideration exception does not apply in restraint of trade. The authority is stated in, Davis v Mason (1793).

Restraint of Trade

The basic propositions for common law principles on restraints of trade are found in,

Nordenfelt v Maxim Nordenfelt Buns and Ammunition Co

Facts: Nordenfelt developed a business in connection with the manufacture of quick-firing guns, and later sold it to a company (Sale of business Contract). With his concurrence the business was transferred to the respondent company and, as part of the arrangement, he entered a covenant not to engage in a competing business for 25 years.
Held: The covenant could be considered on the footing of a direct transfer of goodwill by Nordenfelt to the respondent, and was not void as an unjustifiable restraint of trade. Although it was unlimited in space, the covenant was reasonable and, having regard to the worldwide nature of the business, not wider than was necessary for the protection of the respondent. It could therefore be enforced by an injunction against Nordernfelt.

Lord Macnaghten: “The public have an interest in every person’s carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void….. if the restriction is reasonable- reasonable, that is, in reference of the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.”

If a restraint is unreasonable it is unenforceable even if the covenantor has acted in a way, which would have been within the boundaries of a reasonable restraint. This is seen in, Papastravou v Gavan [1968] 2 NSWR 286 where the restraint went beyond what was reasonable, and the plaintiffs were unable to obtain relief even though, had the restraint been limited to a more reasonable radius, it would undoubtedly have been enforceable.

OR

This case illustrates the fact that at common law a covenant in restraint of trade which is found to be unreasonable in extent is not enforceable even though the covenantor has acted in a way which could have been the subject of a valid restraint

As can be seen from Nordenfeldt, the prima facie proposition that a restraint is unenforceable is subject to the qualification that it will be enforced if reasonable. A number of points relating to reasonableness need to be made:

* Onus of Proof

The onus of proof is establish in Herbert Morris Ltd v Saxelby, in the following terms:

- The covenantor (Burden party by the restraint) has to show that it is unreasonable to the public
- The convenantee (benefit from the restraint) has to show is unreasonable between the parties

* The Time at which Reasonableness is assessed

The relevant time for examining the reasonableness of a restraint is the time of entry into the contract (Nordenfeldt case)

Qualifying the events after the contract has been entered into can be taken into account only to clarify events prior to and up to the date of entering into the contract

* Reasonableness in the Interest of the Public

The major public interest is the maintenance of competition in business and trade. However, simply because a restraint lessens competition does not necessarily mean it is also unenforceable as seen in Queensland Co-operative Milling Association v Pamag Pty Ltd (1973).

It was thought that reasonable gauge was only determined as to if it was in the interests of the parties to the contract it is also reasonable from the perspective of the public interest (Esso Petroleum v Harper’s Garage).

One feature of the modern cases is to give more prominence to the public interest than was formerly overtly in evidence and in the Esso case, Lord Hodson held one of the restrictive covenants in issue to be unreasonable on the basis that it was injurious to the public.

This was later qualified to include the interests of the public in Baker v Lintott.

* Reasonableness in the Interest of the Parties

The pivotal interest that a covenantee seeks to protect with a restraint is his/her goodwill in a business. In assessing whether the restraint is reasonable it can only go so far as to provide, as stated in Nordenfeldt, ‘adequate protection’ to the covenantee.

EXAMPLE. The purpose of the restraint of trade is to give the purchases time to establish a relationship with the customers etc… and so the purchaser needs to be given time to protect that good will.

Common considerations include with regard to reasonableness – what is reasonable:

a) Scope of the restraint in terms of the geographical area covered by the restraint.
b) Acts or Activities covered by the restraint. What the covenantor is restrained from doing and whether the convenantor must refrain from doing the acts referred to, for the covenantee to be adequately protected.
c) Duration must be taken into account. The longer the restraint the less likely it is that the restraint will be held to be reasonable.

Two further points about duration may be noted:

1) It is sometimes possible to lay down guidelines for parties to particular types of contracts. For example, in Esso Petroleum Co LTd v Harper’s Garage (Stourport) Ltd a period not exceeding 5 years to purchase their petroleum supplies from the one supplier, was said, as a general rule, not to be unreasonable.

2) Also, whether the restraint is to operate after the termination of the contract. Generally, a restraint is more likely yo be regarded as reasonable, where it operates for no longer than the duration of the contract.

d) Benefit derived by the parties. When reasonableness is an issue, the court will place emphasis on the benefit derived by the parties from the contract.

Thus, the benefit to be taken into account are, as Walsh J said in, Amoco Australia v Rocca Bros “not limited” to what the covenantor “receives in money or other Property”. The effect of having regard to benefits obtained under the contract is to make the “quantum” and perhaps even the “adequacy” of the consideration received by the covenantor relevant to the issue of reasonableness.

e) Bargaining position of the parties. The courts are willing to show more latitude if there is a relatively equal bargaining position between them.

There are some markets and industries where restraints are so well established and widely practised that acceptance of some restraints is in effect part of the price of entry into the industry or market. This is seen in

Amoco Australia v Rocca Bros,

“Amoco and rocca negotiated on an equal footing – rocca was not under pressure to agree to amoco’s suggestions. It was in rocca’s interests to enter into an agreement with some oil company ensuring supplies for the service station. An arrangement effected by means of a lease and an underlease is not an uncommon way for an oil company to obtain a tie over a service station and, generally speaking, the terms of the underlease were not unusual.”

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Additional Notes - Restraint of Trade

Additional Notes:

Particular Contracts, under reasonableness in the interest of the parties:

Sale of business

Refer to, Nordefelt v Maxim Nordenfelt Guns and Ammuninition Co Ltd

Employment contracts: matters to be considered

Employment contracts are subjected to a stricter approach than contracts for the sale of a business. It is quite common for a restraint clause in an employment contract to fail to pass the test of reasonableness on the ground that it is too wide, or for too long a period.

Gibbs J explained in Geraghty v Minter, that the courts will “in general take a stricter and less favourable view in restraint of trade entered into between employer and employee than of similar covenants between vendor and purchaser”

The proper approach is followed, as established by this case:

1. The properly protectable interests of the employer must be identified. Eg. Goodwill, geographical nature, location of clients.

2. The status, functions and duties of the particular employee must be determined. Eg. Contact with clients, level of seniority, responsibility within employers operations, possession of trade secrets, confidential information.

3. The particular restraint imposed foes no further than to safeguard the employer’s protectable interest.

Employment Contracts: Illustrations

Lindner v Murdock

Facts: The defendant was employed as a mechanic by the plaintiff, who carried out business as a motor and general engineer in Crystal Brook and Wirrabara in South Australia. After employment for 3 years at Crystal Brook, the defendant left the plaintiff and obtained work at a garage located two or three hundred yards from the plaintiffs garage. The clause in the contract stated that the defendant would not, for the term of his employment or within a period of one year from the termination thereof “in any way carry on or be engaged concerned or interested…in the business of the garage proprietors, motor and general engineers…or in any similar business now and hereafter carried on” by the plaintiff in the same area.
Issue: Was the clause in the contract reasonable, therefore an injunction could be soughed to enforce the clause?
Held: The majority of the High Court held the restraint to be unreasonable because it extended not only to Crystal Brook where he had contract with clients, but also to Wirrabara, where the defendant had never been employed.

Kittos J’s held that a restraint which applied “indiscriminately”, to all the areas in which the plaintiff carried on business, went beyond what was “reasonably necessary” to prevent the injury to their business, because of the limited extent of the defendant’s employment.

Partnership agreements: General

Geraghty v Minter

Facts: A deed of partnership stated the business of the partnership as being “that of insurance loss and allied business activities”. Clause 21 stated that in the event of dissolution of the partnership its members are not to carry out business in the same nature and within a radius of 20 miles for a period of 3 years. The defendant breached this clause and the plaintiff sought an injunction. The defendant argues that the restraint clause was unreasonable but was rejected by the courts.
Held: Gibbs J said that it was “probably right to regard partnership agreements as sui generis…and to treat some cases where there is in fact a sale of goodwill as different from those in which an employee is taken into partnership”.

In the present case the plaintiffs had retained a substantial interest in the goodwill and the restraint clause was intended to protect the interest of he parties.

Partnership agreements: Solicitors

Bridge v Deacons - The privity council states the applicable principle of a solicitor agreement.

Facts: The plaintiffs sought to enforce a restraint clause contained in a partnership with the defendant. The relevant clause stated a person who ceased to be a partner would not “for a periods of five years act as a solicitor, notary, trade mark or patent agent to in any similar capacity” in Hong Kong for “any person, firm or company who was at the time of his ceasing to be a partner or had during the period of 3 years thereto been a client of the partnership”
Held: The defendants claim that the clause was unreasonable was rejected. This was because the defendant had the most valuable asset, which was the goodwill. Therefore, the Plaintiff had good reason to protect their goodwill against appropriation by the defendant, in which five specific factors were referred to:

1) The protect did not extend beyond the clients of the plaintiff’s practice
2) The restraint applied equally to all partners.
3) The five year periods was not unreasonably long
4) The quantum of consideration provided for by the partnership agreement was not insignificant and could be justified.
5) There was a “clear public interest in facilitating the assumption by established solicitors firms of younger mean as partners” as the restraint may discourage the introduction of young solicitors.

Exclusive dealing and other commercial transaction

Exclusive dealings occur where a manufacturer and retailer reach an agreement under, which the retailer agrees to take all requirements exclusively from the manufacturer.

Reasonableness in this context is between the parties, thus assuming the parties have in fact bargained at arms’ length.

Exclusive dealing is seen in Amoco Australia v Rocca Bros, whereby the majority of the High Court held that the 15 year restraint to be too long and unreasonable. Moreover, the terms of the underlease were quite stringent (harsh) from Rocca’s point of view. In particular, Rocca was bund to purchase the minimum quantities of petrol and oil regardless of the state of trade and the market conditions.

The restraint covenants in the underlease were therefore held to be unenforceable.

Exclusive Service Contracts

An exclusive service contract obliges a person to provide a service exclusively to the other party to the contract. Eg. Football players.

Thus, an exclusive service contract is seen in A Schroeder Music Publishing Co Ltd v Macaulay.

The decision: The House of Lords had little difficulty in holding that the contract was in restraint of trade and that it could not be justified on the grounds that:

- There was no obligation on the defendants to publish the plaintifss’ work – The plaintiff could not even recover the copyright in a work which the defendants refused to publish
- The agreement was unreasonably long
- The bargain was an unfair one form the plaintiff’s point of view, the defendants having used their superior bnargaining position to obtain an unconscionable contract.

Effects of the Trade Practices Act 1974 (C’th) on Restraint of Trade

The Trade Practices Act in Part IV is concerned with anti-competitive conduct undertaken by corporations engaged in trade and commerce, eg. Monoplisation, exclusive dealing, retail price maintenance etc.

However, s. 51(2) excludes from the operation of these provisions, restraints on employees; restraints on partners, and contracts for sale of a business protecting a purchaser’s goodwill in that business. Thus, the common law rules are unaffected by the Act in these cases.

Effects of the Restraint of Trade Act 1976 (NSW) on Restraint of Trade

The Restraints of Trade Act has the effect of saving some restraints that would otherwise be unenforceable at common law are valid in s. 4(1), which stipulates:

“A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.”

This allows the court to ignore the fact that the restraint goes beyond what is reasonable if it can be enforceable to an extent, which is reasonable.

The effect of this provision s4 (1) is to overcome the type of situation described above and which occurred in Papastravou v Gavan. This case illustrates the fact that at common law a covenant in restraint of trade, which is found to be unreasonable in extent, is not enforceable even though the covenantor has acted in a way, which could have been the subject of a valid restraint.

However, if s4 (1) stood alone it would provide no incentive for the parties to try arrive at a reasonable restraint. Thus, s4 (1) is qualified by s4 (3) which allows a person subject to a restraint to apply to the court in circumstances where the restraint is against public policy as regards its apllication to the applicants,

“By reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable one”.

Section 4 (3) of the Restraints of Trade Act, therefore discourages this sought of behaviour in s4 (1) by saying that if the restraint is manifestly excessive (manifest failure) then the restraint will be unenforceable, as seen in K A & C Smith v Ward.

Interpretation of the Act

A broad interpretation to the Restraints of Trade Act 1976 (NSW) was given by Mc Lelland J in,

Orton v Melman

Facts: The parties had a partnership contract incorporating a clause 24 imposing a restraint for the period of 3 years on an outgoing member of the partnership and within the radius of 8 miles. The defendant breached the contract by leaving the partnership early and opened a practice (surgery) within the radius and within 6 months after leaving. The plaintiff sought an injuction to restraint he defendant and the defendant sought relief under s4 (3) of the Act.
Held: McLelland J’s approach to the Act was as followed:

- First, the court must decide independently of public policy, whether the restraint has been breached by the covenantor.
- Second, assuming that a breach has been established, the courts must decide whether the restraint in its application to that breach, is contrary to public policy.

Applying this approach, McLelland J held that clause 24 had been breached but that it was not contrary to public policy in its application to the defendant’s breach. Therefore, it was reasonable for an outgoing member of the partnership to be restraint from practice with in the radius and in regards to the duration, he concluded that 3 years was not an unreasonable long period.

McLelland J was satisfied that the plaintiffs were entitled to the injunction relief.

As to s4 (3), McLelland J considered it was a “condition precedent of the power of the court to grant relief under this provision” where it is found that “a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint”.