12. Illegality and Restraint of Trade

A brief note on Competition policy

The law has tried to protect competition for a long, long time. At common law, a contract in restraint of trade has to be reasonable if it is to be enforceable. The essence of the restraint of trade doctrine is still contained in the famous speech of Lord MacNaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535:

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 . . . .

More recently, the old common law rules have been supplemented by statutory provisions. The earliest laws in the UK were enacted in the period following the Second World War, when businesses had to adjust to the requirements of peacetime and switch from co-operation in the national interest to an environment in which they had to compete for business.

Later, the European Economic Community (and, before it, the Coal and Steel Community and the Atomic Energy Community) established rules designed to preserve competition as an essential part of creating a common market. These rules remain essentially in force today, and they are now closely followed by domestic laws in all EC Member States – as well as in candidate states, of which Turkey is the current example, and other countries which have simply adopted a tried-and-tested set of rules (Russia).

•  The importance of compliance

Competition rules are backed by tough sanctions – in the case of the Competition Act 1998, enough to make offender’s eyes water, according to the then Director-General of Fair Trading. Not only are there sanctions for organisations that breach the rules, but there are also criminal sanctions for individuals who lead their employers into illegal activities. Breaches of the rules, even inadvertent, can have serious consequences.

The consequences of breaching competition rules are not limited to the penalties that can be imposed by the authorities. The reason we have competition rules is to protect the consumer from conspiracies of businesses who, left to their own devices, would be inclined to maximise profits rather than supplying the market at a price where supply and demand are in equilibrium. In other words, competition laws are designed to prevent businesses getting away with making fewer goods (or supplying less or fewer services) at a higher price, so that consumer welfare is maximised. Businesses involved in such conspiracies against the public, or who abuse their market power to make super-normal profits, can expect the media to take an interest in their activities and breaches of the rules can be public relations disasters.

Those affected by breaches of the rules also have rights to claim damages from the businesses that have caused them damage. Claims for damages have been rare up to now, but following the Crehan case (although that was ultimately unsuccessful) it can be expected that more claims will be made. Law suits are pending in the replica football kit affair, for example.

Competition law is important enough to merit putting substantial effort into avoiding breaches. Compliance requires first a familiarity with the rules, so the largest part of this presentation is devoted to an explanation of the substantive rules and their enforcement.

Crehan v Inntrapreneur [2006] UKHL 38.

 

12.1 Illegal and Void Contracts

As a general proposition, the courts will not enforce contracts whose purpose is illegal and this includes not only agreements that are criminal in intent but also injurious to society in the wider sense.

The Law Commission published a consultation paper on Effects of Illegality on Contracts and Trusts in 1999 (Law Com. No. 154), but has not yet recommended any reform of the law.

In order to have an understanding of that topic, however, it will be necessary to look at the question of illegality generally.

12.1.1 Illegal contracts

Contracts may be illegal under English law in one of two ways, either by statute or on the grounds of public policy. (The effects of illegality under foreign law are more complex, and are not covered here).

Illegal by statute

A contract may be expressly forbidden by statute or the prohibition may be implied, e.g.

Cope v Rowlands (1836) 2 M & W 149
A statute required that persons acting as stockbroker must obtain a licence or forfeit £25. The plaintiff did brokerage work for the defendant without a licence. In the absence of an express prohibition, the brokerage contract was held impliedly illegal since the object of the licences was to protect the public.

Contracts illegal under public policy

A further group of contracts are illegal at common law on the grounds of public policy and include contracts to commit a crime, a tort or a fraud.

Everett v Williams (1725), see 9 LQ Rev 197.
A contract by two highwaymen to ambush a coach was illegal.

Similarly, contracts promoting sexual immorality are likewise illegal.

Pearce v Brooks (1866) LR 1 Exch 213
A prostitute hired a carriage “of intriguing design” for the purposes of her trade. The contract was held illegal.

The modern approach

The modern tendency is for the courts to look more benignly on agreements which contemplate stable extra-marital relations, thus in Somma v Hazlehurst [1978] 2 All ER 1011 (overruled but not on this issue) an unmarried couple rented a room but the contract was not struck down on the grounds of public policy.

Other contracts illegal on public policy grounds are contracts prejudicial to public safety, contracts prejudicial to the administration of justice (e.g. stifling a prosecution), contracts promoting corruption in public life and contracts to defraud the revenue.

12.1.2 The Consequences of illegality

Where a contract is illegal, the consequences are in general as follows:

(i) The contract is void and therefore neither party can sue upon it – ex turpi causa non oritur actio (no right of action arises from a base case);

(ii) Money paid or property transferred under the contract are normally not recoverable; (although there are exceptions; for example, in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548; [1992] 4 All ER 409 the owner of the money was not a party to the gaming contract, and the casino was order to repay the stolen money which had been used for gambling).

(iii) Related transactions will also be void, see e.g. Fisher v Bridges (1854) 3 E & B 642.

12.1.3 Void Contracts

Certain contracts are expressly declared to be void by statute.

The most notable examples are wagering contracts (rendered void by the Gaming Act 1845 ) and restrictive trading agreements (controlled by the Restrictive Trade Practices Act 1976 ). Individual resale price maintenance agreements are rendered void by the Resale Prices Act 1976 .

In addition mere are three categories of contract that are void at common law on the grounds of public policy; (i) contracts to oust the jurisdiction of the courts; (ii) contracts prejudicial to the status of marriage, and (iii) contracts in restraint of trade, which will now be considered more fully below.

 

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12.2 Contracts in Restraint of Trade

Prior to the case of Mitchel v Reynolds (1711) 1 P Wms A contract regulating or preventing trade was void.

Lord Smith L.C. said,

“it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice. If the law has regulated or restrained his mode of doing this, the law must be obeyed. But no power short of the general law ought to restrain his free discretion.”

In Mitchel v Reynolds , allowing for a more flexible approach, it was decided that a restraint was prima facie valid if it was supported by consideration and did not extend over the whole kingdom. The validity of present day restraints is considered below.

12.2.1 Definition

Esso Petroleum v Harper’s Garage (Stourport) Ltd [1968] 2 AC 269

“A contract in restraint of trade is one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not parties to the contract in such manner as he chooses.”

Lord Hodson, adopting the formulation put forward by Diplock LJ in Petrofina (Great Britain) Ltd v Martin [1966] Ch 146

“Every member of the community is entitled to carry on any trade or business he chooses and in such manner as he thinks the most desirable in his own interests, so long as he does nothing unlawful; with the consequence that any contract which interferes with the free exercise of his trade or business, by restricting him in the work he may do for others, is a contract in restraint of trade. It is invalid unless it is reasonable as between the parties.”

Lord Morris, (ibid) referring to Lord Denning MR in Petrofina .

 

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12.2.2 Types of contract

Much of the case law concerns contractual clauses in contracts for the sale of a business or in written contracts of employment.

Vendor/Purchaser covenants

The buyer of a business, e.g. a shop, will want an assurance that the seller will not immediately set up in competition next door and entice back the old customers.

Employer/Employee covenants

An employee, on terminating his employment with a particular employer, will agree not to work for a competing employer nor set up a competing business.

Both types of agreement usually have some limits of area and duration.

 

12.2.3 Effect of restraint covenants

Covenants: prima facie void

Covenants in restraint of trade are contrary to public policy and prima facie void, unless they can be regarded as reasonable as between the parties and as regards the public interest.

The rule, whereby the restraint could not be general, no longer applies. In Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535 the owner of an armaments business who sold it was held to a covenant applicable for 25 years anywhere in the world.

Burden of proof

The burden of proving that, as between the parties, the restraint is reasonable lies on the promisee; the burden of proving that as far as the public interest is concerned, the restraint is unreasonable lies on the promisor. Reasonableness is considered as at the time of the agreement.

Commercial Plastics v Vincent [1965] 1 QB 623

12.3 The principles of enforcement

12.3.1 Three conditions must be satisfied

In employer/employee and vendor/purchaser covenants three conditions must be satisfied:

(a) there must be an interest to protect

(b) the restraint must be reasonable, and

(c) it must not be contrary to the public interest.

While the principles will apply both to employer/employee and vendor/purchaser covenants the law is very much stricter in relation to the former and the latter will be considered later in so far as the criteria differ.

12.3.2 There must be an interest to protect

The interest to be protected comes from the relationship of vendor/purchaser or employer/employee.

Where there is no such relationship, a bare promise not to compete will not be upheld.

Freedom from competition is not an interest which may be protected, as such.

An agreement imposing a restriction on an employee after leaving an employer will only be reasonable between the parties if there is some proprietary interest of the employer meriting protection:

The valid proprietary interests are trade secrets and trade connection.

Treitel notes that the common law will give the employer a degree of protection where there is no covenant:

* Using or disclosing trade secrets (at any time)

Faccenda Chicken v Fowler [1986] ICR 297

* Soliciting the employer’s customers (only to solicitation during employment)

* Using or disclosing confidential information (Normally limited to employee’s conduct during employment but thereafter if he sells memorised lists (as opposed to using it himself)

The proprietary interests may all be protected specifically by covenant.

The restriction must be no wider than reasonably necessary to protect such interest. The employer may not protect himself against competition from his employee. (A vendor of a business may be able to protect himself against competition.)

The classic statement of these principles by Lord MacNaghten is to be found in Nordenfelt’s Case (1894) AC 535.

Two cases illustrate these principles:

Forster v Suggett (1918) 35 TLR 87
D was employed as the works manager of the P’s glass works. He agreed that for five years after termination of employment with P, he would not divulge any secret manufacturing process learnt during employment, nor would he work in the glass industry in the UIC. It was held that the restraint was reasonable to protect P’s legitimate interest and was enforceable.

Herbert Morris Ltd v Saxelby [1916] 1 AC 688
The respondent was employed by the appellants as a draftsman in their business of manufacturing lifting machinery. The company had its head office in Loughborough and branches in eight large cities. The contract of employment contained a clause that for seven years after leaving he would not become engaged anywhere in the UK in any similar business. The House of Lords held that the clause was wider than reasonably necessary to protect the appellant’s interest – the appellants were merely trying to reduce competition.

Lord Atkinson said that the clause would deprive the respondent …

“for a lengthened period of employing, in any part of the United Kingdom, that mechanical and technical skill and knowledge which … his own industry, observation and intelligence have enabled him to acquire in the very specialised business of the appellants, thus forcing him to begin life afresh, as it were, and depriving him of the means of supporting himself and his family”.

12.3.3 Employer / Employee covenants Trade secrets, know-how and trade connection

An employer is entitled to protect his trade secrets but may not restrict an employee from using his skill and knowledge – even if that skill was acquired while the employee worked for the employer.

Herbert Morris v Saxelby [1916] 1 AC 688

The interests which the law will protect are trade secrets and trade connection.

 

(a) Trade secrets

Trade secrets include secret formulae, processes and confidential information (but excluding information which is confidential only in the sense that during employment the employee must not reveal it.

Faccenda Chicken v Fowler [1986] ICR 297

(b) Know-how

Know-how, once considered as not within legal protection, given commercial application and potential is likely to be protected.

Treitel observes that Pearson LJ in Commercial Plastics v Vincent [1965] 1 QB 623 has hinted at this.

(c) Trade connection

An employer is entitled only to protection in cases where the employee was likely to have come into contact with clients or customers and to have acquired influence over them.

Faccenda Chicken v Fowler [1986] ICR 297

Restraints protecting business connection have been upheld in the case of:

A milk roundsman – Home Counties Dairies v Skilton [1970] 1 WLR 526

A solicitor’s clerk – Fitch v Dewes [1921] 2 AC 158

A restraint against an employee who had had no contact with the employer’s clients would not be upheld.

12.3.4 The restraint must be reasonable

The Court will only enforce restraint covenants which go no further than is reasonably necessary to protect the employer’s interest.

The Court will not uphold a covenant which seeks to protect employer’s activities which the employee was not involved in.

A covenant in a tailor’s service agreement against working as a hatter was struck down as unreasonable

Attwood v Lamont [1920] 3 KB 571

(a) Area of restraint

To some extent an employer may actually protect himself against competition from an employee because the law allows a restraint preventing an employee from setting up in business – to prevent exploitation of trade secrets or trade connection – within a given (reasonable) area for a given (reasonable) time.

An area restraint will be struck down as void if it covers an area wider than is necessary for the protection of the employer’s interest.

Mason v Provident Clothing & Supply Co Ltd [1913] AC 724
A restriction on a canvasser was held void as the area of restraint (25 miles of London) was one thousand times larger than the area of employment.

Fitch v Dewes [1920] 2 Ch 159
A life-long restraint on a solicitor’s managing clerk not to work within seven miles of Tamworth was held to be reasonable in the circumstances.

Arbuthnot Fund v Rawlings [2003] EWCA Civ 518 Chadwick LJ considered the Home Counties Dairies v Skelton and Littlewoods v Harris [1997] approaches.

# The first task of the court – faced with the contention that post-termination restraints on an employee’s ability to engage in future business activity are not enforceable – is to construe the contract under which those restraints are said to be imposed. That, as it seems to me, is a task which the court ought to carry out on an application for interim relief (if there is one) if it can properly do so. Unless the court is satisfied that there are disputed facts which bear on the construction of the relevant contractual terms, and that those facts cannot be resolved without a trial, the court at the interlocutory stage is as well able to construe the relevant contractual terms as a court will be at a trial. There is no need to put off until trial determination of the question – what do the contractual terms mean? The court can, and should, determine the scope of the restraints which, as a matter of construction, the contractual terms seek to impose.

# It is not suggested, in the present case, that there are disputed facts which need to be resolved before the task of construction can properly be undertaken. In addressing that task, it is necessary to keep in mind two factors; the first is that the exercise is one of construction; and that, in the construction of a covenant in restraint of trade, the same principles are to be applied as in the construction of any other written term. The principles are conveniently set out in this context in the judgment of Lord Justice Harman in this Court in Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526. At page 533 he pointed out that it is the first principle in construing written documents that the court should consider the circumstances at the time when they were made, and the position of the parties who entered into them. He referred to the observations of Sir Nathaniel Linley MR in Haynes v Doman [1899] 2 Ch 13, 25;

“Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to be attained by them. In cases such as the one before us, the object is the protection of one of the parties against rivalry in trade. Such agreements cannot be properly be held to apply to cases which, although covered by the words of the agreement, cannot be reasonably supposed ever to have been contemplated by the parties, and which on a rational view of the agreement are excluded from its operation by falling, in truth, outside, and not within, its real scope.”

# That approach is particularly apposite in a case such as the present. The opening words of clause 15.1, which govern the sub-clauses which come after it, are these:

“In order to protect the goodwill confidential information trade secrets and business connections of the company ….. ”

Those words direct the reader to construe what comes afterwards with that object in view. Unless compelled by the language to do so, the court should not construe what comes afterwards so as to encompass activities which could never have been thought by the parties as likely to damage the goodwill or business connections which the clause (as a whole) is intended to protect.
# The second factor which it is necessary to keep in mind is that it is not the function of the court to strive to give to the clause a meaning which enables it to have effect within the constraints of public policy if that is not the meaning which, as a matter of construction, the parties are to be taken to have intended that it should have. As Lord Justice Simon Brown put it in J A Mont (UK) Ltd v Mills [1993] IRLR 172 at paragraph 28 on page 176:

” ….. the court should not too urgently strive to find within restrictive covenants ex facie too wide, implicit limitations such as alone could justify their imposition.”

# The court must steer a course between giving to the clause a meaning which is extravagantly wide; and giving to the clause a meaning which is artificially limited. The task of the court, in construing the contractual term is simply to ask itself: “what did these parties intend by the bargain which they made in the circumstances in which they made it?”

 

(b) Duration of the restraint

The Court will consider the nature of the business to be protected when determining reasonableness as to duration.

In Fitch v Dewes [1920] 2 Ch 159
A life-long restraint on a solicitor’s managing clerk not to work within seven miles of Tamworth was held to be reasonable because the clients of the firm would have been likely to have wanted to deal with the former managing clerk for a very long time.

12.3.5 Other interests meriting protection

From time to time the courts are prepared to recognise other interests as meriting protection, apart from trade secrets and business connection.

Greig v Insole [1978] 1 WLR 302
A case arising out of the Packer cricket affair, when Packer established a rival set of teams to games to international test cricket, and poached players. It was held that the governing bodies of cricket had a legitimate interest in the administration of the game to justify the imposition of reasonable restraints on the players. However it was also held that the bans in question, preventing players who had joined the Packer organisation from playing in test and county cricket, were too wide. In this case, however, it should be noted that there was no contract between the governing body and the players.

See also:

Eastham v Newcastle United Football Club Ltd [1964] Ch 413

See also the exclusive dealing cases:

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269

A Schroeder Music Publishing Co v Macauley [1974] 1 WLR 1308

Treitel suggests that these new interests are ‘commercial’ interests and that an expressly drawn covenant would be needed to protect them whereas, at common law, the other interests, to a limited extent, are protected in the absence of a covenant.

12.3.6 Reasonableness

Exceptionally, agreements between an employer and an employee will be held unreasonable as regards the public interest.

Wyatt v Kreglinger and Fernau [1933] 1 KB 793
An employee (a wool worker) was promised a pension on his retirement and it was agreed that he would not receive the pension if he competed against his employers in the wool trade. The Court of Appeal held the transaction void – it was contrary to the public interest to deprive the community of a valuable skill.

The Court will examine the relative strength of the bargaining position of the parties. The Court will be particularly concerned to ensure that the dominant party does not take advantage of the weaker party.

Public interest is almost impossible to define. It is unlikely that a particular restraint will be struck down simply because some broad based economic interest will be effected. Precision of drafting will be required. The public interest is likely to focus on the freedom of the individual to work with restriction.

12.3.7 Construction of restraint clauses

It is clear that the court cannot redraft a restraint clause that is too wide but it can, as a matter of construction, reach the conclusion that the parties intended to limit the clause to matters which are legitimate to protect. The following case is an illustration of this approach:

Littlewoods v Harris [1978] 1 All ER 1026
Harris was executive director of the mail-order firm of Littlewoods. He entered into a restraint clause whereby he agreed not to work for any company in the Great Universal Stores group for a period of 12 months after leaving Littlewoods. Harris had acquired a great deal of confidential information with regard to the catalogue which is the whole foundation of the mail-order business. Great Universal Stores were Littlewoods’ main rival in the mail-order business, however Great Universal Stores operated worldwide and their business was not confined to mail-order, whereas Littlewoods operated only in the UK. Littlewoods sought an injunction against Harris to prevent him from working for Great Universal Stores.

The Court of Appeal held that although the clause, on its literal wording, was too wide, by construing the clause by reference to circumstances existing when the contract was made, it was possible to limit it to those matters it was clearly intended to protect, i.e. the mail-order business in the UK.

12.3.8 Drafting of restraint covenants

It is of crucial importance to ensure that the restraint clause is not drafted to widely. As will be seen, the Court has power to strike out offending clauses and leave valid clauses intact provided the clause or contract as a whole when then construed makes sense. The Court does not have power to add to or vary or re-write a clause. The danger of a valid provision being failing because a part of the same clause is struck down as void is ever present.

Commercial Plastics v Vincent [1965] 1 QB 623

See the section on severance towards the end of this section.

12.3.9 Agreements between the buyer and seller of a business

Restraints imposed on the seller of a business to restrict competition are more readily upheld than restraints on employees but are generally subject to the same principles.

In particular, there must be a proprietary interest meriting protection, and so:

(i) only the actual business sold is entitled to protection. See, for example, British Reinforced Concrete Co v Schleff [1921] 2 Ch 563, and therefore

(ii) a restriction which purports to restrain a business not actually carried on will be void – Vancouver Malt and Sake Co Ltd v Vancouver Breweries Ltd [1934] AC 181.

(iii) Area covenants in vendor/purchaser cases are readily enforced even if the area is worldwide as in the Nordenfelt case.

Note that this would effectively prevent the vendor dealing even with people he had had no contact with while he owned the business ( Plowman & Son v Ash [1964] 1 WLR 568).

12.3.10 Difficult cases

Treitel makes the point that the distinction between employer/employee and vendor/purchaser contracts is by no means exhaustive. He suggests that covenant by a retiring doctor or solicitor would not fall into either category Bridge v Deacons [1984] AC 705 and asserts that the Courts will not subject such covenants to the strict employer/employee rules.

Treitel then gives the illustration of the man who sells his business to a company and then becomes managing director of the company working under a covenant. Treitel suggests that this type of case would be treated in the same more generous manner as vendor/purchaser covenants.

On the other hand, Treitel gives the illustration of a writer or composer agreeing not to dispose of his work save to a particular publisher and suggests that this will be treated akin to an employer/employee covenant – even though there was no contract of employment between the two parties.

A Schroeder Music Publishing Co v Macauley [1974] 1 WLR 1308

12.3.11 Agreements between manufacturers to restrict output and fix prices

Such agreements are prima facie void at common law but the courts have been prepared to uphold where reasonable, e.g. to avoid a glut on the market; English Hop Growers v Dering (1928) 2 KB 174. See also:

Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1919] 1 KB 418
Two manufacturers agreed not to employ each others employees for five years after they left their original employer. The Court of Appeal held that the contract was void as it covered all employees whether they knew trade secrets or not and that it was of excessive duration.

In fact such agreements are now almost entirely subject to statutory control under the Restrictive Trade Practices Act 1976 .

12.3.12 Exclusive dealing agreements

“Solus” agreements, for example, whereby a garage agrees to purchase all its supply of petrol from one oil company, are within the doctrine of restraint of trade and are prima facie void.

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269
The owner of two garages agreed, inter alia, to sell only Esso’s petrol, in return for a rebate on the price per gallon. On one of the garages, the tie was to last for nearly four and a half years and on the other it was to last for 21 years, being contained in this case in a mortgage of the premises to Esso. The House of Lords upheld the four and a half year agreement although the agreement for 21 years was held to be unreasonable and void as being longer than necessary to protect Esso’s interests i.e. the continuity and stability of their marketing operation.

However, if a trader, when purchasing or leasing new premises, covenants with the vendor or lessor (in the conveyance or lease) to buy only the latter’s products, and then goes into possession, the exclusive dealing tie is outside the restraint of trade doctrine; Harper’s Case . This would apply to a person who buys or takes a lease of a public house or garage subject to a tie; the reason is that the person has surrendered no freedom previously enjoyed.

The approach of the courts to exclusive dealing ties is illustrated by Alec Lobb (Garages) Ltd v Total Oil Ltd [1985] 1 WLR 173. The plaintiffs, whilst in financial difficulties, leased their garage to the defendant oil company for 51 years at a premium of £35,000. The defendants sub-leased it back to the plaintiffs for 21 years at an annual rent of £2,500, with a mutual right to break at 7 or 14 years. The sublease contained a solus tie whereby the plaintiffs agreed to sell only the defendants’ petrol. The Court of Appeal held that the lease and lease-back were subject to the restraint of trade doctrine but the tie was valid as being reasonable in the circumstances. The principal purpose of the agreement was as a financial rescue operation from which the plaintiffs benefited as they received ample consideration (£35,000) for the lease and they were free to exercise the break clause after 7 or 14 years.

A Schroeder Music Publishing Co v Macauley [1974] 1 WLR 1308.

Exclusive service agreements, such as where, for example, a songwriter agrees to provide his services for a music publisher for a period of time, are within the restraint of trade doctrine (i.e. prima facie void) if oppressive and one-sided.

12.4 Effects of the contract being void

The effects discussed below relate to contracts void at common law and will apply by analogy to contracts void by statute unless the statute in question has special provisions dealing with the matter. The effects are as follows:

The contract is void insofar as it contravenes public policy

Wallis v Day (1837) 3 B & A 113

A contract of employment contained a provision which was alleged to be a void restraint of trade. This did not prevent the plaintiff being able to recover arrears of salary. It follows from this that subsequent or collateral transactions are not necessarily void unless they relate solely to that part of the original transaction that is itself void.

Money paid or property transferred is recoverable

Authority for this proposition is to be found in Herman v Charlesworth (1905) 2 KB 123.

Severance

Severance is the power of the court to remove a void provision in a contract and enforce the remainder. The power exists in the case of void contracts and there is authority that an illegal contract may be subjected to severance, Carney v Herbert (1985) AC 301.

Severance will not be possible if it would eliminate the whole or substantially the whole of the consideration given by a party to the contract; Wyatt v Kreglinger and Fernau [1933] 1 KB 793.

It may be possible to sever in the sense of removing the void part of a promise and enforcing the rest. This will be possible providing the severance does not alter the meaning of the contract in any way.

Goldsoll v Goldman (1915) 1 Ch 292

D sold a jewellery business to the plaintiff, D covenanting that he would not deal in real or imitation jewellery in the United Kingdom or in other specified foreign places. The restraint as to the latter was too wide in the circumstances, as was the reference to real jewellery since the business dealt only in imitation jewellery in the United Kingdom. The void restrictions were severed leaving a valid contract in restraint of trade.

Contrast: Attwood v Lamont [1920] 3 KB 571

D was employed as a tailoring cutter for the plaintiff, a general outfitter. The defendant covenanted not to subsequently engage in a number of trades carried on by the plaintiff’s business, including tailor, milliner, draper, hatter and haberdasher within a ten mile radius. The court refused to sever so as to leave the tailoring restriction valid; the covenant formed a single indivisible covenant for the protection of the plaintiff’s entire business. It was not a series of covenants for the protection of each department of the plaintiff’s business. The whole covenant was therefore void.

It should further be noted that the court will not re-draft the covenant in any way, thus applying the so-called “blue pencil test”. The court will merely strike out the offending words; what is left must make sense without further additions.

12.5 Competition Law

Many contracts between businesses which restrain trade will fall foul of the Competition Act 1998 , or at the EU level, of EU competition law, except where the relevant competition authorities have permitted exceptions to the rules against anti-competitive practises. Competition law is too complex to summarise here, but it is important to be aware that in practice some agreements in restraint of trade may raise competition law issues as well as common law issues.

 

Demonstration Question – Restraint of Trade

Fleming was employed by Barclays De Zoete Wedd, sellers of scientific and technical machinery, three years ago as a senior sales executive. A term of the service agreement provided that Fleming on leaving De Zoete Wedd’s employment would not participate in the business of selling scientific and technical machinery for a period of ten years within a twenty five mile radius of Barclays De Zoete Wedd’s head office where Fleming was employed.

Fleming resigned last month and has taken employment with Fi-Sci Scientific Instruments selling the same range and type of equipment as he sold while employed by Barclays De Zoete Wedd. Fi-Sci have offices within two hundred yards of the Barclays De Zoete Wedd headquarters.

Advise Fleming.

Would it make any difference

(a) If the original service contract with Fleming had six months still to run?

(b) Fleming was involved with Fi-Sci Scientific Instruments working for a subsidiary company selling powerboats

(c) The covenant contained a further clause restricting Fleming from working in any capacity for a competitor.

 

Questions on Illegal and Void Contracts

1. What is a contract in restraint of trade?

2. Which contracts fall within the doctrine of restraint of trade and what is the legal position with regard to these contracts?

3. What proprietary interests does the law allow to be protected?

4. What is a solus agreement?

5. When can the void part of a contract be severed from the valid part?

 

Tutorial – Restraint of Trade

1. Melchester United Football Club, currently top of the First Division, has a contract of employment with Roy Race, a talented twenty four year old striker whose performances draw the crowds. Race’s match-winning skills are largely due to the coaching of the club’s manager Ron Knee and Race has had the opportunity to learn something of Knee’s unique management style. In the agreement Race covenants that during employment he will work for no other employer in any capacity whatsoever and after leaving that he will “not play football for any First Division club within a 50 mile radius of Melchester for two years nor be employed as a manager or coach for any club in the UK for 20 years”. There are several leading clubs in the area of 50 miles around Melchester.

Advise Race as to the validity of the agreement, assuming it is not contrary to the rules of the sport’s governing body.

2. Boffin is offered a post as a research chemist with Quaxo Ltd, a British company with pharmaceutical interests throughout the United Kingdom. He is told that he will have to accept a restraint clause in his contract of employment, and that other employees of the company who have contracts without restraint clauses are consequently employed on considerably lower salaries than the lucrative one which he is being offered. Reluctantly he accepts.

The restraint clause provides that Boffin is not to be employed “as a research chemist by Coots Ltd or by any other company involved in pharmaceuticals, within three years of his employment with Quaxo Ltd”

One year later, Boffin, with due notice, terminates his employment with Quaxo Ltd, and accepts employment with Coots Ltd as a research chemist, specialising in research into anti-arthritis drugs. Coots Ltd is Quaxo’s main rival in the United Kingdom market in anti-arthritis drugs.

Advise Quaxo Ltd