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”.