LAWS104 Study Guide - Final Guide: Metcash, William Gummow, Susan Crennan
25 Jun 2018
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ILLEGALITY – COMMON LAW ILLEGALITY –
CONTRACTS IN RESTRAINT OF TRADE
Contracts in restraint of trade
Jaddcal v Minson (No 3) (Le Miere J)
-For a restraint to be reasonable the restraining party must establish an identifiable interest calling for
protection. A bare covenant restrictive of competition even if it is limited in point of time and place
cannot be sustained. The interest must be that of the party seeking to enforce the restraint
Nordenfelt the House of Lords upheld the validity of a clause restraining Thorsten Nordenfelt, the seller of a
munitions business, from setting up a similar business in Europe or North America for a period of 25 years. In
this industry, the clause was regarded as reasonable at that point in history
True meaning
-The task of construing a restraint of trade clause is one of ascertaining the intention of the parties and
of applying that intention (Upper Hunter County District Council)
-If the language of a provision is open to two constructions, courts should prefer the construction that
will avoid consequences that appear to be capricious, unreasonable, inconvenient, or unjust (Australian
Broadcasting Commission)
-The clause should not be uncertain (Northern Tablelands Insurance Brokers)
-In Positive Endeavour v Madigan, the South Australian Full Court, in allowing an appeal, held a
particular restraint clause was not uncertain, but was invalid as it went beyond what was reasonable for
protection
Contracts in restraint of trade
Assessing the ‘reasonableness’ of a restraint in trade
-In assessing reasonableness, courts focus upon the practical effect of the restraint and, as part of that
focus, upon whether there exists a legitimate interest to protect
Amoco Australia v Rocca Bros (Gibbs J)
-The requirement that the restriction be reasonable in the interests of the parties has been explained as
meaning that the restraint ‘must afford no more than adequate protection to the party in whose favour it
is imposed’, or in other words, ‘does the restriction exceed what is reasonably necessary for the
protection of the covenantee?’
-The fundamental rule remains that the restraint must be reasonable in the interests of the contracting
parties, and it would not be in the interest of a convenantor to subject himself to any restraint unless he
received some advantage by doing so
Baker v Lintott the Supreme Court of Alberta declared a restraint, which had the effect of preventing a
medical practitioner from practising in a particular town, to be unenforceable, even though as between the
parties it was reasonable. Forsyth J observed that it was unreasonable on the public interest ground because
the restraint affected the ‘entitlement of the public to the widest possible choice and selection of their medical
practitioners’
Note
-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 (Maggbury)
-The party seeking to rely on the restraint must provide consideration to be able to enforce the restraint
Principles
-Restraints of trade provisions in a contract are presumed to be void or invalid (Nordenfelt). This
presumption may be rebutted if the restraint affords no more than reasonable protection to the party in
whose favour it is imposed and is not injurious to the public (Esso Petroleum)
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-The restraint must give no more than adequate protection to the party who seeks to enforce it. It will be
unreasonable if it is greater than needed to give adequate protection to the legitimate interests of the
person for whose benefit the restraint is imposed (Amoco Australia)
-The party who seeks to enforce the restraint has the onus of proving that the restraint is reasonable as
between the parties. The restraint must operate to protect a legitimate interest of the convenantee. The
test is whether the restrictive convenant exceeds what is reasonable and necessary for the protection of
the legitimate interest (Amoco Australia)
-The meaning of a restraint clause may be construed by reference to the surrounding circumstances (I F
Asia Pacific)
-The reasonableness of the restraint is determined at the date of entry into the agreement (Amoco
Australia). Reasonably foreseeable expansions are taken into account in determining the scope of a
protectable interest
-Industry practice will be relevant to determine reasonableness (Esso Petroleum)
-Whether a particular restraint operates unnecessarily is to be determined not by the form in which the
restraint is framed, but by its effect and operation in practice (Cream)
Principles cont.
-Any inequality of bargaining power between the parties will be relevant in considering reasonableness.
A court is more willing to show latitude if the parties are of equal bargaining power (Amoco Australia)
-If a restraint is unreasonable, it is unenforceable even if the convenantor has acted in a way that would
have been within the boundaries of a reasonable restraint
-If the parties to a restraint acknowledge that the restraint is reasonable, that is a factor to be considered,
but is not conclusive
Vendor – Purchaser Restraints
-The vendor of the goodwill of a business will usually agree that after the sale of the business is
finalised, he or she will not carry on a similar business in competition with the purchaser within a
specified area for a specified time
-Vancouver Malt and Sake Brewing v Vancouver Breweries: the owner of a brewer’s licence sold
the licence to another brewer and agreed not to brew beer for 15 years. The court found as fact that the
seller did not use the brewer’s licence and the buyer had no genuine interest to protect. As a result, the
restraint of trade clause was void.
-Cream v Bushcolt: a question arose as to whether a state-wide convenant in restraint of trade for 10
years was unreasonable. The Western Australian Court of Appeal held that the restraint as void and
unenforceable in the circumstances.
-Hankinson v Brookview Holdings: involved a contract for the sale of a video store. The particular
contract contained a restraint clause, which specified that the vendors of the business were not to
engage either directly or indirectly in any capacity whatsoever as principal or employee in any business
or activity of a similar nature for a period of two years and within a radius of 10 km from the business
that was being sold. The restraint, when taken into a practical context, was found not to be
unreasonable.
Employer-Employee Restraints
-The general view is that subject to reasonable restraints to protect an employer’s legitimate interests, an
employee should be free to pursue a living in his or her chosen field (Vision Eye Institution v Kitchen)
-The court in genera take a stricter and less favourable view of covenants in restraint of trade entered
into between employer and employee than of similar covenants between vendor and purchaser
(Geraghty v Minter)
-This is explained by the fact that in the employment context, an employer is in a better bargaining
position that the employee
-Applegarth J in Vision Eye Institute v Kitchen: ‘One test is to ask how long it will take the connection
between the ex-employee and the customer to die away’
-Former employees are not entitled to take documents belonging to the employer, or to use for their own
purposes information that is in fact confidential and which was ascertained in the course of the
employment (Corporations Act 2000 (Cth))
Protection of Trade Secrets
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