Exceptions to Freedom to Trade
The purchaser of the goodwill of a business sought to enforce a covenant in restraint of trade given by the seller.
Held: At common law a restraint of trade is prima facie contrary to public policy and void, unless it can be shown that the restraint is, in the circumstances of the particular case, reasonable.
Lord Watson said: ‘I think it is now generally conceded that it is to the advantage of the public to allow a trader who has established a lucrative business to dispose of it to a successor by whom it may efficiently be carried on. That object could not be accomplished if, upon the score of public policy, the law reserved to the seller an absolute and indefeasible right to start a rival business the day after he sold. Accordingly it has been determined judicially, that in cases where the purchaser, for his own protection, obtains an obligation restraining the seller from competing with him, within bounds which having regard to the nature of the business are reasonable and are limited in respect of space, the obligation is not obnoxious to public policy, and is therefore capable of being enforced.’
Lord MacNaughten discussed the doctrine of restraint of trade: ‘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.’ and ‘The true view at the present time I think, is this: 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. That is the general rule. But there are exceptions: 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 protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.’
Judges:
Lord Macnaughten, Lord Watson
Citations:
[1894] AC 535, [1893] 1 Ch 630
Jurisdiction:
England and Wales
Citing:
Restated – Mitchel v Reynolds 1711
A bond or promise to restrain oneself from trading in a particular place, if made upon a reasonable consideration, is good. (So Davis v Mason, 5 TR 118.) Secus if it be on no reasonable consideration, or to restrain a man from trading at all.
Appeal from – Maxim Nordenfelt Guns and Ammunition Co v Nordenfelt CA 1893
Bowen LJ said: ‘Rules which rest upon the foundation of public policy, not being rules which belong to the fixed or customary law, are capable, on proper occasion, of expansion or modification’ . .
Cited by:
Cited – Herbert Morris Ltd v Saxelby HL 1916
For a covenant in restraint of trade to be treated as reasonable in the interests of the parties ‘it must afford no more than adequate protection to the benefit of the party in whose favour it is imposed.’ There is a need for the court to consider . .
Cited – Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd HL 1968
Agreement in Restraint of Trade Unenforceable
The defendant ran two garages under solus agreements with the plaintiffs who complained when the defendants began to purchase petrol from cheaper alternative sources. The House was asked whether the solus agreements were be regarded in law as an . .
Cited – Norris v United States of America and others HL 12-Mar-2008
The detainee appealed an order for extradition to the USA, saying that the offence (price-fixing) was not one known to English common law. The USA sought his extradition under the provisions of the Sherman Act.
Held: It was not, and it would . .
Cited – Alec Lobb (Garages) Ltd v Total Oil Ltd CA 1985
The court was asked whether the terms of a lease and lease back amounted to an unconscionable bargain and was unenforceable.
Held: The court affirmed the decision at first instance, but emphasised the need for unconscientious behaviour rather . .
Cited – Tillman v Egon Zehnder Ltd SC 3-Jul-2019
The company appealed from rejection of its contention that its former employee should be restrained from employment by a competitor under a clause in her former employment contract. . .
Lists of cited by and citing cases may be incomplete.
Employment, Contract
Leading Case
Updated: 10 April 2022; Ref: scu.249228