Restraint of Trade
Cases
Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd
[1967] UKHL 1, [1968] AC 269
Lord Reid
The most general statement with regard to restraint of trade is that of
Lord Parker in Commonwealth of Australia v. Adelaide Steamship Com-
pany [1913] AC 781 at page 794. He said: ” Monopolies and contracts in
” restraint of trade have this in common, that they both, if enforced, involve
” a derogation from the common law right in virtue of which any member
” of the community may exercise any trade or business he pleases and in
” such manner as he thinks best in his own interests “. But that cannot
have been intended to be a definition: all contracts in restraint of trade
involve such a derogation but not all contracts involving such a derogation
are contracts in restraint of trade. Whenever a man agrees to do something
over a period he thereby puts it wholly or partly out of his power to ” exer-
” cise any trade or business he pleases ” during that period. He may enter
into a contract of service or may agree to give his exclusive services to
another: then during the period of the contract he is not entitled to engage
in other business activities. But no one has ever suggested that such con-
tracts are in restraint of trade except in very unusual circumstances, such as
those in Young v. Timmins (1831) C. & J. 331 where the servant had agreed
not to work for anyone else but might have been given no work and
received no remuneration for considerable periods and thus have been
deprived of a livelihood: the grounds of judgment may not now be correct
but I think that the case was rightly decided.
That Lord Parker cannot have intended those words to be a definition
is I think made clear by a passage lower on the same page of the report:
” Contracts in restraint of trade were subject to somewhat different
” considerations. There is little doubt that the common law in the
” earlier stages of its growth treated all” (my italics) ” such contracts
” as contracts of imperfect obligation, if not void for all purposes; they
” were said to be against public policy in the sense that it was deemed
” impolitic to enforce them.”
He certainly never supposed that all contracts which by obliging a man to
act in one way (e.g. as a servant) prevented him from doing other things
had ever been held to be of imperfect obligation or against public policy.
The leading case of Nordenfelt v. Maxim Nordenfelt Guns [1894] A.C.
535 fell within the old categories, and it may be misleading to take the well-
known passages out of context and try to apply them to cases of quite
different nature. Lord Macnaghten said at page 565:
” 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.”
By ” interference ” he meant interference to which the individual had agreed
by contract but I am sure that he did not mean to include all cases in
which one party had ” interfered ” with the liberty of another by getting him
to agree to give his whole time to the other party’s affairs. He had said
(on page 564):
” In the age of Queen Elizabeth all restraints of trade, whatever they
” were, general or partial, were thought to be contrary to public policy,
” and therefore void.”
So he only had in mind the two original kinds of case. There was no
need in Nordenfelt’s case to attempt to define other classes of case to which
the doctrine of restraint would apply.
If a contract is within the class of contracts in restraint of trade the law
which applies to it is quite different from the law which applies to contracts
generally. In general unless a contract is vitiated by duress fraud or mistake
its terms will be enforced though unreasonable or even harsh and uncon-
scionable, but here a term in restraint of trade will not be enforced unless
it is reasonable. And in the ordinary case the Court will not remake a
contract: unless in the special case where the contract is severable, it
will not strike out one provision as unenforceable and enforce the rest. But
here the party who has been paid for agreeing to the restraint may be
unjustly enriched if the Court holds the restraint to be too wide to be
enforceable and is unable to adjust the consideration given by the other
party.
It is much too late now to say that this rather anomalous doctrine of
restraint of trade can be confined to the two classes of case to which it was
originally applied. But the cases outside these two classes afford little
guidance as to the circumstances in which it should be applied. In some it
has been assumed that the doctrine applies and the controversy has been
whether the restraint was reasonable. And in others where one might have
expected the point to be taken it was not taken, perhaps because Counsel
thought that there was no chance of the Court holding that the restraint was
too wide to be reasonable.
In McEllistrim v. Ballymacelligott Co-operative Society [1919] A.C. 548
the Society had changed its rules so as to prevent any member from selling
(except under heavy penalty) any milk produced by him in a large area of
County Kerry to anyone except the Society, and a member could not terminate
his membership without the Society’s permission. The plaintiff, who was a
member, sought a declaration that the new rules were in unreasonable restraint
of trade. Lord Birkenhead, L.C., assumed that they were in restraint of
trade and held that they were unreasonable, as did Lord Atkinson and Lord
Shaw. Lord Finlay said (at page 571), having referred to Morris v. Saxelby
[1916] I A.C. 688: “The present case is really governed by the principle
” there enunciated that ‘ public policy requires that every man shall be at
” ‘ liberty to work for himself and shall not be at liberty to deprive himself
” ‘ or the State of his labour, skill or talent, by any contract that he enters
” ‘ into ‘. This is equally applicable to the right to sell his goods “. I doubt
whether this last sentence is quite accurate. It would seem to mean that
every contract by which a man (or a company) agrees to sell his whole output
(or even half of it) for any future period to the other party to the contract
is a contract in restraint of trade because it restricts his liberty to sell as he
pleases, and is therefore unenforceable unless his agreement can be justified
as being reasonable. There must have been many ordinary commercial
contracts of that kind in the past but no one has ever suggested that they
were in restraint of trade. But McEllistrim’s case at least establishes that
there comes a point at which such a contract can come within the doctrine
of restraint of trade.
In English Hop Growers v. Dering [1928] 2 K.B. 174 the defendant had
agreed to sell his crop of hops to the Society for five years. He failed to do
so and was sued: in defence he pleaded that the contract was in restraint
of trade. The restraint was held to be reasonable but both Scrutton, L.J.,
and the other Members of the Court appear to have been prepared to treat
this as a contract in restraint of trade. This was not just an ordinary agree-
ment, it was rather a marketing scheme accepted by the great majority of
English hop growers.
In Foley v. Classique Coaches [1934] 2 K.B. 1 the purchaser of a piece of
land agreed with the seller to take from him all the petrol required for the
purchaser’s business carried on there. The question whether this was in
restraint of trade was dealt with briefly, Scrutton, L.J., merely saying that
it was not in ” undue restraint of trade “. In Servais Bouchard v. Princes
Hall Restaurant [1904] 20 T.L.R. 574 the Court of Appeal held valid a
contract by which the Restaurant agreed to take all burgundy sold there from
the plaintiffs. It is not very clear whether they held that this was not in
restraint of trade or that, though in restraint of trade, it was reasonable.
In United Shoe Machinery Company of Canada v. Brunet [1909] AC 330
the Company leased machinery under a condition that it should not be used
in conjunction with machinery made by any other manufacturer, and it was
held that this condition was not in restraint of trade. I do not think that
the reasons given for the decision are very satisfactory. Mogul Steamship Com-
pany v. McGregor Gow & Co. [1892] A.C. 25 is relied on. There an associa-
tion of shipowners agreed to use various lawful means to dissuade customers
from shipping their goods by the Mogul line. It was held that this agree-
ment was lawful in the sense that it gave the Mogul Company no right to
sue them. But it was recognised at least by the majority of their Lordships
that the agreement would have been unenforceable as between the members
of the association. Lord Watson said (at page 42) ” an agreement by traders
” to combine for a lawful purpose, and for a specified time, is not binding
” upon any of the parties to it if he chooses to withdraw, and consequently
” cannot be enforced in invitum “. One must always bear in mind that an
agreement in restraint of trade is not generally unlawful if the parties choose
to abide by it: it is only unenforceable if a party chooses not to abide by it.
The main argument submitted for the Appellant on this matter was that
restraint of trade means a personal restraint and does not apply to a restraint
on the use of a particular piece of land. Otherwise, it was said, every
covenant running with the land which prevents its use for all or for some
trading purposes would be a covenant in restraint of trade and therefore
unenforceable unless it could be shown to be reasonable and for the protec-
tion of some legitimate interest. It was said that the present agreement only
prevents the sale of petrol from other suppliers on the site of the Mustow
Green garage: It leaves the Respondents free to trade anywhere else in any
way they choose. But in many cases a trader trading at a particular place
does not have the resources to enable him to begin trading elsewhere as
well, and if he did he might find it difficult to find another suitable garage
for sale or to get planning permission to open a new filling station on
another site. As the whole doctrine of restraint of trade is based on public
policy its application ought to depend less on legal niceties or theoretical
possibilities than on the practical effect of a restraint in hampering that
freedom which it is the policy of the law to protect.
It is true that it would be an innovation to hold that ordinary negative
covenants preventing the use of a particular site for trading of all kinds
or of a particular kind are within the scope of the doctrine of restraint of
trade. I do not think they are. Restraint of trade appears to me to imply
that a man contracts to give up some freedom which otherwise he would
have had. A person buying or leasing land had no previous right to be
there at all, let alone to trade there, and when he takes possession of that
land subject to a negative restrictive covenant he gives up no right or freedom
which he previously had. I think that the ” tied house ” cases might be
explained in this way, apart from Biggs v. Hoddinott [1898] 2 Ch. 307 where
the owner of a freehouse had agreed to a tie in favour of a brewer who
had lent him money. Restraint of trade was not pleaded. If it had been
the restraint would probably have been held to be reasonable. But there
is some difficulty if a restraint in a lease not merely prevents the person
who takes possession of the land under the lease from doing certain things
there, but also obliges him to act in a particular way. In the present case
the Respondents before they made this agreement were entitled to use this
land in any lawful way they chose, and by making this agreement they
agreed to restrict their right by giving up their right to sell there petrol not
supplied by the Appellants.
In my view this agreement is within the scope of the doctrine of restraint
of trade as it had been developed in English law. Not only have the
Respondents agreed negatively not to sell other petrol but they have agreed
positively to keep this garage open for the sale of the Appellants’ petrol at
all reasonable hours throughout the period of the tie. It was argued that
this was merely regulating the Respondent’s trading and rather promoting
than restraining his trade. But regulating a person’s existing trade may be
a greater restraint than prohibiting him from engaging in a new trade. And
a contract to take one’s whole supply from one source may be much more
hampering than a contract to sell one’s whole output to one buyer. I would
not attempt to define the dividing line between contracts which are and
contracts which are not in restraint of trade, but in my view this contract
(must be held to be in restraint of trade. So it is necessary to consider
whether its provisions can be justified.
But before considering this question I must deal briefly with the other
agreement tying the Corner Garage for 21 years. The rebate and other
advantages to the Respondents were similar to those in the Mustow Green
agreement but in addition the Appellants made a loan of £7,000 to the
Respondents to enable them to improve their garage and this loan was to
be repaid over the 21 years of the tie. In security they took a mortgage
of this garage. The agreement provided that the loan should not be paid
off earlier than at the dates stipulated. But the Respondents now tender
the unpaid balance of the loan and they say that the Appellants have no
interest to refuse to accept repayment now except in order to maintain the
tie for the full 21 years.
The Appellants argue that the fact that there is a mortgage excludes any
application of the doctrine of restraint of trade. But I agree with your
Lordships in rejecting that argument. I am prepared to assume that, if
the Respondents had not offered to repay the loan so far as it is still out-
standing, the Appellants would have been entitled to retain the tie. But,
as they have tendered repayment, I do not think that the existence of the
loan and the mortgage puts the Appellants in any stronger position to
maintain the tie than they would have been in if the original agreements
had permitted repayment at an earlier date. The Appellants must shew that
in the circumstances when the agreement was made a tie for 21 years was
justifiable.
It is now generally accepted that a provision in a contract which is to be
regarded as in restraint of trade must be justified if it is to be enforceable,
and that the law on this matter was correctly stated by Lord Macnaghten in
the Nordenfelt case. He said:
” Restraints of trade and interference with individual liberty of action
” may be justified by the special circumstances of a particular case. It is
” a sufficient justification, and indeed it is the only justification, if the
” restriction is reasonable—reasonable, that is, in reference to 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 protec-
” tion to the party in whose favour it is imposed, while at the same
” time it is in no way injurious to the public.”
So in every case it is necessary to consider first whether the restraint went
farther than to afford adequate protection to the party in whose favour it
was granted, secondly whether it can be justified as being in the interests of
the party restrained, and thirdly whether it must be held contrary to the
public interest. I find it difficult to agree with the way in which the Court
has in some cases treated the interests of the party restrained. Surely it can
never be in the interest of a person to agree to suffer a restraint unless he gets
some compensating advantage, direct or indirect. And Lord Macnaghten
said ” of course the quantum of consideration may enter into the question
” of the reasonableness of the contract “.
Where two experienced traders are bargaining on equal terms and one has
agreed to a restraint for reasons which seem good to him the Court is in
grave danger of stultifying itself if it says that it knows that trader’s interest
better than he does himself. But there may well be cases where, although the
party to be restrained has deliberately accepted the main terms of the contract,
he has been at a disadvantage as regards other terms: for example where a
set of conditions has been incorporated which has not been the subject
of negotiation—there the Court may have greater freedom to hold them
unreasonable.
I think that in some cases where the Court has held that a restraint was
not in the interests of the parties it would have been more correct to hold
that the restraint was against the public interest. For example in Kores v.
Kolok [1959] 1 Ch. 108 the parties had agreed that neither would employ
any man who had left the service of the other. From their own points
of view there was probably very good reason for that. But it could well be
held to be against the public interest to interfere in this way with the freedom
of their employees. If the parties chose to abide by their agreement an
employee would have no more right to complain than the Mogul Company
had in the Mogul case. But the law would not countenance their agreement
by enforcing it. And in cases where a party, who is in no way at a disad-
vantage in bargaining, chooses to take a calculated risk, I see no reason why
the Court should say that he has acted against his own interests: but it can
say that the restraint might well produce a situation which would be contrary
to the public interest.
Again, whether or not a restraint is in the personal interests of the parties,
it is I think well established that the Court will not enforce a restraint which
goes farther than affording adequate protection to the legitimate interests
of the party in whose favour it is granted. This must I think be because too
wide a restraint is against the public interest. It has often been said that
a person is not entitled to be protected against mere competition. I do not
find that very helpful in a case like the present. I think it better to ascertain
what were the legitimate interests of the Appellants which they were entitled
to protect and then to see whether these restraints were more than adequate
for that purpose.
What were the Appellants’ legitimate interests must depend largely on what
was the state of affairs in their business and with regard to the distribution
and sale of petrol generally. And those are questions of fact to be answered
by evidence or common knowledge. In the present case restraint of trade
was not pleaded originally and the Appellants only received notice that it
was to be raised a fortnight before the trial. They may have been wise in
not seeking a postponement of the trial when the pleadings were amended.
But the result has been that the evidence on this matter is scanty. I think
however that it is legitimate to supplement it from the considerable body of
reported cases regarding solus agreements and from the facts found in the
Report of the Monopolies Commission of July, 1965.
When petrol rationing came to an end in 1950 the large producers began
to make agreements, now known as solus agreements, with garage owners
under which the garage owner, in return for certain advantages, agreed to sell
only the petrol of the producer with whom he made the agreement. Within
a short time three-quarters of the filling stations in this country were tied in
that way and by the dates of the agreements in this case over 90 per cent,
had agreed to ties. It appears that the garage owners were not at a disad-
vantage in bargaining with the large producing companies as there was
intense competition between these companies to obtain these ties. So we
can assume that both the garage owners and the companies thought that
such ties were to their advantage. And it is not said in this case that all ties
are either against the public interest or against the interests of the parties.
The Respondents’ case is that the ties with which we are concerned are for
too long periods.
The advantage to the garage owner is that he gets a rebate on the whole-
sale price of the petrol which he buys and also may get other benefits or
financial assistance. The main advantages for the producing company
appear to be that distribution is made easier and more economical and
that it is assured of a steady outlet for its petrol over a period. As regards
distribution it appears that there were some 35,000 filling stations in this
country at the relevant time, of which about a fifth were tied to the Appel-
lants. So they only have to distribute to some 7,000 filing stations instead
of to a very much larger number if most filling stations sold several brands
of petrol. But the main reason why the producing companies want ties
for five years and more instead of ties for one or two years only seems to
be that they can organise their business better if on the average only one-
fifth or less of their ties come to an end in any one year. The Appellants
make a point of the fact that they have invested some £200 millions in
refineries and other plant and that they could not have done that unless
they could foresee a steady and assured level of sales of their petrol. Most
of their ties appear to have been made for periods of between five and
twenty years. But we have no evidence as to the precise additional advan-
tage which they derive from a five year tie as compared with a two year
tie or from a twenty years tie as compared with a five year tie.
The Court of Appeal held that these ties were for unreasonably long
periods. They thought that, if for any reason the Respondents ceased to
sell the Appellants’ petrol, the Appellants could have found other suitable
outlets in the neighbourhood within two or three years. I do not think
that that is the right test. In the first place there was no evidence about
this and I do not think that it would be practicable to apply this test in
practice. It might happen that when the Respondents ceased to sell their
petrol, the Appellants would find such an alternative outlet in a very
short time. But, looking to the fact that well over 90 per cent, of existing
filling stations are tied and that there may be great difficulty in opening a
new filling station, it might take a very long time to find an alternative. Any
estimate of how long it might take to find suitable alternatives for the
Respondents’ filling stations could be little better than guesswork.
I do not think that the Appellants’ interest can be regarded so narrowly.
They are not so much concerned with any particular outlet as with main-
taining a stable system of distribution throughout the country so as to
enable their business to be run efficiently and economically. In my view
there is sufficient material to justify a decision that ties of less than five years
were insufficient, in the circumstances of the trade when these agreements
were made, to afford adequate protection to the Appellants’ legitimate
interests. And if that is so I cannot find anything in the details of the
Mustow Green agreement which would indicate that it is unreasonable.
It is true that if some of the provisions were operated by the Appellants
in a manner which would be commercially unreasonable they might put the
Respondents in difficulties. But I think that a Court must have regard
to the fact that the Appellants must act in such a way that they will be able
to obtain renewals of the great majority of their very numerous ties some of
which will come to an end almost every week. If in such circumstances
a garage owner chooses to rely on the commercial probity and good sense
of the producer I do not think that a Court should hold his agreement
unreasonable because it is legally capable of some misuse. I would there-
fore allow the appeal as regards the Mustow Green agreement.
But the Corner Garage agreement involves much more difficulty. Taking
first the legitimate interests of the Appellants, a new argument was submitted
to your Lordships that, apart from any question of security for their loan,
it would be unfair to the Appellants if the Respondents, having used the
Appellants’ money to build up their business, were entitled after a com-
paratively short time to be free to seek better terms from a competing
producer. But there is no material on which I can assess the strength of
this argument and I do not find myself in a position to determine whether
it has any validity. A tie for twenty-one years stretches far beyond any
period for which developments are reasonably foreseeable. Restrictions
on the garage owner which might seem tolerable and reasonable in reason-
ably foreseeable conditions might come to have a very different effect in
quite different conditions: the public interest comes in here more strongly.
And, apart from a case where he gets a loan, a garage owner appears to
get no greater advantage from a twenty year tie than he gets from a five year
tie. So I would think that there must at least be some clearly established
advantage to the producing company—something to show that a shorter
period would not be adequate—before so long a period could be justified.
But in this case there is no evidence to prove anything of the kind. And
the other material which I have thought it right to consider does not appear
to me to assist the Appellant here. I would therefore dismiss the appeal
as regards the Corner Garage agreement.
I would add that the decision in this case—particularly in view of the
paucity of evidence—ought not in my view to be regarded as laying down
any general rule as to the length of tie permissible in a solus agreement.
And I do not think that the case of Petrofina v. Martin [1966] Ch. 146 can
be regarded as laying down a general rule. The agreement there was in un-
usual terms. I think the decision was right although I do not agree with
all the reasons. But I must not be taken as expressing any opinion as to the
validity of ties for periods mid-way between the two period.
Enderby Town Football Club Ltd v The Football Association Ltd
[1971] Ch 591
Lord Denning MR
“Has the court any power to go behind the wording of the rule and consider its validity? On this point Sir Elwyn Jones made an important concession. He agreed that if the rule was contrary to natural justice, it would be invalid. I think this concession was rightly made and I desire to emphasise it. The rules of a body like this are often said to be a contract. So they are in legal theory. But it is a fiction – a fiction created by the lawyers so as to give the courts jurisdiction. This is no new thing. There are many precedents for it from the time of John Doe onwards. Putting the fiction aside, the truth is that the rules are nothing more nor less than a legislative code – a set of regulations laid down by the governing body to be observed by all who are, or become, members of the association. Such regulations, though said to be a contract, are subject to the control of the courts. If they are in unreasonable restraint of trade, they are invalid: see Dickson v Pharmaceutical Society of Great Britain [1967] Ch. 708 ; [1970] A.C. 403 . If they seek to oust the jurisdiction of the court, they are invalid: see Scott v Avery (1856) 5 H.L.Cas. 811 . If they unreasonably shut out a man from his right to work, they are invalid: see Nagle v Feilden [1966] 2 Q.B. 633 ; Edwards v. Society of Graphical and Allied Trades [1971] Ch. 354 . If they lay down a procedure which is contrary to the principles of natural justice, they are invalid: see Faramus v Film Artistes’ Association [1964] A.C. 925 , 947, per Lord Pearce. All these are cases where the judges have decided, avowedly or not, according to what is best for the public good. I know that over 300 years ago Hobart C.J. said the “Public policy is an unruly horse.” It has often been repeated since. So unruly is the horse, it is said [per Burrough J. in Richardson v Mellish (1824) 2 Bing. 229 , 252], that no judge should ever try to mount it lest it run away with him. I disagree. With a good man in the saddle, the unruly horse can be kept in control. It can jump over obstacles. It can leap the fences put up by fictions and come down on *607 the side of justice, as indeed was done in Nagle v Feilden [1966] 2 Q.B. 633 . It can hold a rule to be invalid even though it is contained in a contract.
Take an instance from this present case. The F.A. have a rule 40 (b) which says:
“The rules of the association are sufficient to enable the council as the governing authority to deal with all cases of dispute, and legal proceedings shall only be taken as a last resort, and then only with the consent of the council.”
If that rule were valid, it would prevent the club from bringing any action in the courts without the consent of the council. But the rule is plainly invalid. Foster J. said that “it is against public policy to make provisions ousting the jurisdiction of the court.” Lord Kilbrandon in Scotland said simply that it is “contrary to public policy”: see St. Johnstone Football Club Ltd v Scottish Football Association Ltd, 1965 S.L.T. 171.”
Alec Lobb (Garages) Ltd v Total Oil (GB) Ltd
[1984] EWCA Civ 2, [1985] 1 WLR 173
Dillon LJ
“The basis of the contention that the transaction of the Lease and Lease back ought to be set aside in equity is that it is submitted, and in the Court below was accepted on behalf of Total, that during the negotiations for the Lease and Lease back the parties did not have equal bargaining power, and it is therefore further submitted that a contract between parties who had unequal bargaining power can only stand and be enforced by the stronger if he can prove that the contract was in point of fact, fair, just and reasonable. The concept of unequal bargaining power is taken particularly from the judgment of Lord Denning MR in Lloyd’s Bank v Bundy [1975] QB 326. The reference to a contract only standing if it is proved to have been in point of fact fair, just and reasonable is taken from the judgment of Lord Selborne LC in Earl of Aylesbury v Morris LR 8 Ch.App 484 at 490-491. Lord Selborne was not there seeking to generalise; he was dealing only with what he regarded as one of the oldest heads of equity, relieving against fraud practised on heirs or expectants, particularly fraud practised on young noblemen of great expectations, considerable extravagance and no ready-money. It is none the less submitted that the logic of the development of the law leads to the conclusion that Lord Selborne’s test should now be applied generally to any contract entered into between parties who did not have equal bargaining power.
In fact Lord Denning’s judgment in Lloyd’s Bank v Bundy merely laid down the proposition that where there was unequal bargaining power the contract could not stand if the weaker did not have separate legal advice. In the present case Mr Lobb and the Company did have separate advice from their own solicitor. On the facts of this case, however, that does not weaken the appellants’ case if the general proposition of law which they put forward is valid. Total refused to accept any of the modifications of the transaction as put forward by Total which the Company’s and Mr Lobb’s solicitor suggested, and in the end the solicitor advised them not to proceed. Mr Lobb declined to accept that advice because his and the Company’s financial difficulties were so great, and, it may be said, their bargaining power was so small, that he felt he had no alternative but to accept Total’s terms. Because of the existing valid tie to Total which had, as I have said, three to four years to run, he had no prospect at all of raising finance on the scale he required from any source other than Total. There is no suggestion that there was any other dealer readily available who could have bought the property from him subject to the tie. The only practical solutions open to him were to accept the terms of the Lease and Lease back as put forward by Total on which Total was not prepared to negotiate, or to sell the freehold of the property to Total and cease trading. In these circumstances, it would be unreal, in my judgment, to hold that if the transaction is otherwise tainted it is cured merely because Mr Lobb and the Company had independent advice.
But on the learned deputy Judge’s findings can it be said that the transaction is tainted? Lord Selborne dealt with the case before him as a case of fraud. He said at pages 490-1: “The usury laws, however, proved to be an inconvenient fetter upon the liberty of commercial transactions; and the arbitrary rule of equity as to sales of reversions was an impediment to fair and reasonable, as well as to unconscionable, bargains. Both have been abolished by the Legislature; but the abolition of the usury laws still leaves the nature of the bargain capable of being a note of fraud in the estimation of this Court; and the Act as to sales of reversions (31 Vict. c. 4) is carefully limited to purchases “made bona fide and without fraud or unfair dealing”, and leaves under-value still a material element in cases in which it is not the sole equitable ground for relief. These changes of the law have in no degree whatever altered the onus probandi in those cases, which, according to the language of Lord Hardwicke, raise “from the circumstances or conditions of the parties contracting — weakness on one side, usury on the other, or extortion, or advantage taken of that weakness” — a presumption of fraud. Fraud does not here mean deceit or circumvention; it means an unconscientious use of the power arising out of these circumstances and conditions; and when the relative position of the parties is such as prima facie to raise this presumption, the transaction cannot stand unless the person claiming the benefit of it is able to repel the presumption by contrary evidence, proving it to have been in point of fact fair, just, and reasonable.”
The whole emphasis is on extortion, or undue advantage taken of weakness, an unconscientious use of the power arising out of the inequality of the parties’ circumstances, and on unconscientious use of power which the Court might in certain circumstances be entitled to infer from a particular — and in these days notorious — relationship unless the contract is proved to have been in fact fair, just and reasonable. Nothing leads me to suppose that the course of the development of the law over the last 100 years has been such that the emphasis on unconscionable conduct or unconscientious use of power has gone and relief will now be granted in equity in a case such as the present if there has been unequal bargaining power, even if the stronger has not used his strength unconscionably. I agree with the judgment of Browne-Wilkinson J. in Multiservice Bookbinding Ltd v Marden [1979] Ch 84 which sets out that to establish that a term is unfair and unconscionable it is not enough to show that it is, objectively, unreasonable.
In the present case there are findings of fact by the learned Deputy Judge that the conduct of Total was not unconscionable, coercive or oppressive. There is ample evidence to support those findings and they are not challenged by the appellants. Their case is that the Judge applied the wrong test; where there is unequal bargaining power, the test is, they say, whether its terms are fair, just and reasonable and it is unnecessary to consider whether the conduct of the stronger party was oppressive or unconscionable. I do not accept the appellants’ proposition of law. In my judgment the findings of the learned Judge conclude this ground of appeal against the appellants.
Inequality of bargaining power must anyhow be a relative concept. It is seldom in any negotiation that the bargaining powers of the parties are absolutely equal. Any individual wanting to borrow money from a bank, building society or other financial institution in order to pay his liabilities or buy some property he urgently wants to acquire will have virtually no bargaining power; he will have to take or leave the terms offered to him. So, with house property in a seller’s market, the purchaser will not have equal bargaining power with the vendor. But Lord Denning did not envisage that any contract entered into in such circumstances would, without more, be reviewed by the Courts by the objective criterion of what was reasonable. See Lloyd’s Bank v Bundy at page 336. The Courts would only interfere in exceptional cases where as a matter of common fairness it was not right that the strong should be allowed to push the weak to the wall. The concepts of unconscionable conduct and of the exercise by the stronger of coercive power are thus brought in, and in the present case they are negatived by the deputy Judge’s findings.
Even if, contrary to my view just expressed, the Company and Mr and Mrs Lobb had initially in 1969 a valid claim in equity to have the Lease and Lease back set aside as a result of the inequality of bargaining power, that claim was, in my judgment, barred by laches well before the issue of the Writ in this action.
Murgitroyd and Co. Ltd. v. Purdy
[2005] IEHC 159
Clarke J
The final issue which arises is as to the extent to which the non-competition clause may be said to be enforceable having regard to the well established principles concerning contracts in restraint of trade. A restraint on a person working or being engaged in one or more lines of business is by definition a restraint of trade. It is well settled that such a term will not be enforced by the courts unless it meets a two fold test:-
(a) it is reasonable as between the parties; and
(b) it is consistent with the interests of the public
McEllistrom v. Ballymacelligot Co-op (1919) AC 548 at p. 562.
In relation to the first test i.e. reasonableness inter partes, in the leading case of Stenhouse (Australia) Ltd. v. Phillips [1974] A.C., 311, Lord Wilberforce said:-
“The proposition that an employer is not entitled to protection from mere competition by a former employee means that the employee is entitled to use to the full any personal skill or experience even if this has been acquired in the service of his employer: it is this freedom to use to the full a man’s improving ability and talents which lies at the root of the policy of the law regarding this type of restraint. Leaving aside the case of misuse of trade secrets or confidential information … the employer’s claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation”.
The test seems to be, therefore, as to whether in all the circumstances of the case both the nature of the restriction and its extent is reasonable to protect the goodwill of the employer. Clearly certain clauses which preclude solicitation come within that definition provided that they are not excessively wide. In certain other cases clauses have been upheld which have prohibited employees setting up a similar business within a specified distance of an employer’s establishment. See for example Marian White Limited v. Francis (1972) I WLR 1423. But it is clear that the duration of the prohibition and the geographical scope of same are important matters to be considered having regard to the nature of the work in question and the structure of the business.
In Halsbury 4th Ed., Vol. 47, the authors note in para. 31 that where a business is carried on by a small number of people and with customers widely distributed, a very large area will be allowed and a wider restraint may be reasonable in a business carried on by agents or correspondence than in one necessitating constant attendance in person. For example, all of England was regarded as an acceptable area of restriction for an accountant in Isitt & Anor. –v- Ganson [1899] 43 Sol. Jo. 744.
Having heard the evidence presented on behalf of the plaintiff as to the nature of the business in Ireland I am satisfied that there are only 10 (or perhaps 11 if one includes the defendant) patent attorneys operating in Ireland and that they all operate from Dublin. No difficulty would appear to be encountered in servicing the demands of the Irish business from Dublin. In those circumstances it does not seem to me that a geographical restriction based upon the jurisdiction of the Irish state is unreasonable having regard to the way in which the business operates in Ireland.
Having regard to the specialised nature of the business I am also satisfied that a period of 12 months is not unreasonable.
However, it is also clear that a more restrictive view is taken of covenants by employees than is taken of covenants given on sale of a business. Covenants against competition by former employees are never reasonable as such. They may be upheld only where the employee might obtain such personal knowledge of, and influence over, the customers of his employer as would enable him, if competition were allowed, to take advantage of his employer’s trade connection. Kores Manufacturing Co. Ltd. –v- Kolok Manufacturing Co. Ltd. [1959] Ch. 108.
In those circumstances I have come to the view that the prohibition in this case on all competition is too wide. A prohibition on dealing with (in addition to soliciting of) customers of the plaintiff would, in my view, have been reasonable and sufficient to meet any legitimate requirements of the plaintiff. The wider prohibition which restricts dealing with those who might be, but are not, such customers is excessive.
There may be types of business where it is not practical to distinguish between customers and non-customers. This is not one of them. On the evidence, the number of customers is small and identifiable. A prohibition on dealing with those identified customers would be sufficient to prevent the defendant taking advantage of the plaintiff’s trade connections. The wider restriction which prohibits competing for business in which the plaintiff might have an interest but where the client was not an existing customer, could not be directed to that end but to the wider aim of restricting competition as such. As pointed out in Kores that is not a permissible end.
In those circumstances I must view the anti-competition clause as an unreasonable restraint of trade. On that basis I must determine the preliminary issue by finding that the anti-competition charge, while applicable, is unenforceable.