UNIT 11 RESTRAINT OF TRADE

Restraint of trade is a common law doctrine relating to the enforceability of contractual

restrictions on freedom to conduct business. In an old leading case of Mitchell v Reynolds (1711)
Lord Smith LC 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."

Contractual obligations not to trade are illegal agreements on public policy grounds unless they
are reasonable in the interests of both contracting parties and of the public at large. Restraint of
trade mainly affects post-termination restrictive covenants in employment contracts, and
restrictions on competition in contracts for the sale of businesses.

The restraint of trade doctrine's current use is small, given modern and economically oriented
statutes of competition law in most countries. Its approach was based on the two concepts of
prohibiting agreements that ran counter to public policy, unless the reasonableness of an
agreement could be shown. A restraint of trade is simply some kind of agreed provision that is
designed to restrain another's trade. For example, in Nordenfelt v Maxim, Nordenfelt Guns and
Ammunition Co a Swedish arms inventor promised on sale of his business to an American gun
maker that he "would not make guns or ammunition anywhere in the world, and would not
compete with Maxim in any way."

To be a valid restraint of trade in the first place, both parties must have provided valuable
consideration for their agreement to be enforceable. In Dyer's Case a dyer had given a bond not
to exercise his trade in the same town as the plaintiff for six months but the plaintiff had
promised nothing in return. On hearing the plaintiff's attempt to enforce this restraint, Hull J
exclaimed,

"per Dieu, if the plaintiff were here, he should go to prison till he had paid a fine to the King."

The common law has evolved to reflect changing business conditions. So in the early
seventeenth century case of Rogers v Parry it was held that a joiner who promised not to trade
from his house for 21 years could have this bond enforced against him since the time and place
was certain. It was also held (by Chief Justice Coke) that a man cannot bind himself to not use
his trade generally.

This was followed in Broad v Jolyffe and Mitchell v Reynolds where Lord Macclesfield asked,
"What does it signify to a tradesman in London what another does in Newcastle?" In times of
such slow communications and commerce around the country it seemed axiomatic that a general
restraint served no legitimate purpose for one's business and ought to be void. But already in
1880 in Roussillon v Roussillon Lord Justice Fry stated that a restraint unlimited in space need
not be void, since the real question was whether it went further than necessary for the promisee's
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protection. So in the Nordenfelt case Lord Macnaghten ruled that while one could validly
promise to "not make guns or ammunition anywhere in the world" it was an unreasonable
restraint to "not compete with Maxim in any way." This approach in England was confirmed by
the House of Lords in Mason v The Provident Supply and Clothing Co.

Restraining workers

Restraining clauses in employment contracts are enforceable if:

 There is a legitimate interest which needs to be protected. Examples of such interests

include business connections and business secrets.
 The restraint is reasonable, i.e. sufficiently protects the interest and goes no further.

Generally, if a restraining clause is found to be unreasonable, then it will be void. In certain

circumstances though the court may uphold it either by construing ambiguities or by severance.
Severance consists of the application of what is known as the "blue pencil test"; if individual
words which make the clause excessively wide are able to be crossed out and the clause still
makes grammatical sense, without altering the nature of the obligations, then the courts may be
willing to sever the illegal aspects of the clause and enforce the remainder.

Restraint of trade and confidentiality agreements between employers and employees is common
for employers to have a global restraint clause to restrain departing employees from working for
a competitor and that may not be sufficient.

The underlying principle is that for a restraint clause to be enforceable it must be reasonable. The
remedies available to an employer are:

1. Obtain an injunction as soon as possible; and/or

2. Claim for damages.

Delay in obtaining an injunction may result in an unsuccessful application. Time is of the

essence in an application for an injunction.

Injunctions for a breach of a restraint clause may be granted if the employer can show that it has
a legal right that has been infringed, that the breach of that right cannot be adequately
compensated by an award of damages and that the balance of convenience favours the granting
of an injunction. Some of the questions that will require urgent consideration before applying for
interlocutory relief against an ex employee are:

 Is there an express contractual provision which purports to limit what the ex- employee
can do?
 Has the former employee taken any items of property which belongs to the old business?
For example, is he or she in possession of client lists, customer profiles, or other
information in written form?

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  Is the employee intending to engage in soliciting former customers? How is he or she
intending to do so?

In considering post employment restraint it is necessary to distinguish between two situations:

1. Where the employee entered into an express covenant to limit the work which he or she
may do after employment has ceased.
2. In the absence of express contractual provision, where the employer is only entitled to
rely on the general law.

Restraining Competition

The onus of proving that a restriction is reasonable is on the person seeking to enforce the
covenant; the validity of the covenant is to be judged as to the date of the agreement imposing it.
Daly Smith Corp (Aust) Pty Ltd v Cray Personnel Pty Ltd.

If the restraint is void at common law, it may be saved by an application of the Restraint of Trade
Act 1974.

Restraint of Confidential Information

Only certain classes of confidential information are protected including information which:

 Know-how which may have been confidential originally but which has become part of
the employee's skill and knowledge; or
 Specific trade secrets so confidential that even though they may necessarily have been
learned by heart, and even though the employee may have left the service, they cannot be
used for anyone's benefit but the employer.

Post employment obligation

In N E Perry PL v Judge [2002] Doyle CJ said:

The nature of the interest that NEP was entitled to protect was conveniently identified by Latham
CJ in Lindner v Murdock's Garage (1950) . Although Latham CJ was in dissent, what his Honour
said correctly states the position. He said:

"Where an employee is in a position which brings him into close and personal contact with the
customers of a business in such a way that he may establish personal relations with them of such
a character that if he leaves his employment he may be able to take away from his former
employer some of his customers and thereby substantially affect the proprietary interest of that
employer in the goodwill of his business, a covenant preventing him from accepting employment
in a position in which he would be able to use to his own advantage and to the disadvantage of
his former employer the knowledge of and intimacy with the customers which he obtained in the
course of his employment should, in the absence of some other element which makes it invalid,
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be held to be valid. Reference has already been made to the right of an employer to protect his
'trade connection' - a right recognised in cases in which covenants were held to be invalid
because they went beyond what was reasonably necessary to protect such a connection."

The issue for the Judge was whether the restraint on competition, in the form of a covenant not to
practise within Whyalla, was an unreasonable restraint of trade and unenforceable.

As Gibbs J said in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd (1973):

"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' Herbert Morris Ltd. v. Saxelby. In other words, 'does the
restriction exceed what is reasonably necessary for the protection of the covenantee?'
(McEllistrim v. Ballymacelligott Co-operative Agricultural and Dairy Society Ltd. [1919]."

Gibbs J went on to make two further points that are relevant. He said:

"Nevertheless 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 covenantor to subject himself to
any restraint unless he received some advantage by so doing. In my opinion it is permissible, in
asking whether a restraint is reasonable in the interests of the parties, to consider, as part of the
circumstances of the case against which the question of reasonableness is to be decided, the
quantum of consideration received by the covenantor and the effect of the agreement on the
position of the covenantor."

Analogous to the rule that the court is not entitled to concern itself with the adequacy of the
consideration is the further principle that has been restated in the authorities, that where the
parties to a contract have been in a position to bargain on an equal footing they should be treated
as the best judges of what is reasonable in their own interests:

The fact that the parties have bargained from a position of equality is therefore one of the
circumstances to be considered in determining whether the covenants were reasonable, but it
does not save from invalidity a covenant found to be unreasonable or contrary to the public
interest.

Customer lists may well constitute confidential information which the employer is entitled to
protect. In assessing confidentiality, much may depend on the circumstances in which the lists
were compiled and how they were subsequently protected.

Information Acquired in the Course of Employment

The position with respect to the use of information acquired by an employee in the course of his
employment has been considered in detail in Forkserve Pty Ltd v Jack and Aussie Forklift
Repairs (2000) by Santow J:

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"(a) an employee may not solicit customers for a future time when the employment has ceased
and the employee or director has established his or her own business;
(b) once employment has ceased , in the absence of special stipulation, the employee may
canvass the customers of the late employer and may send a circular to every customer".

In Digital Pulse Pty Ltd v Christopher Harris & ors [2002] two employees had restraint clauses
in their contracts which had an express term not to compete with Digital during their
employment. Contrary to the terms of the contract of employment the two employees diverted
business to an entity of their own. The Court found in favour of Digital and awarded damages
against the ex-employees.

In determining the information that is confidential the court generally has regard to the
following, among others:

1. Whether the party expressly informed the other, orally or in writing of any information
that is confidential. The information must be identified with specificity and not merely in
global terms, that which is said to be information in question to be confidential;
2. Show that information has a necessary quality of confidentiality;
3. Show that information was received by the other from the Plaintiff in such circumstances
as to import an obligation of confidence;

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THEORIES OF INDUSTRIAL RELATIONS

Perspective theories

When studying the theories of industrial relations, there are three major perspectives that contrast in
their approach to the nature of workplace relations. The three views are generally described as the
unitary, pluralist and Marxist perspectives. The Marxist perspective is sometimes referred to as the
Conflict Model. Each offers a particular perception of workplace relations and will therefore interpret
such events as workplace conflict, the role of trade unions and job regulation very differently.

Unitary perspective

In Unitarianism, the organization is perceived as an integrated and harmonious whole with the ideal of
"one happy family", where management and other members of the staff all share a common purpose,
emphasizing mutual cooperation. Furthermore, unitarism has a paternalistic approach where it
demands loyalty of all employees, being predominantly managerial in its emphasis and application.

Consequently, trade unions are deemed as unnecessary since the loyalty between employees and
organizations are considered mutually exclusive, where there can't be two sides of industry. Conflict is
perceived as disruptive and the pathological result of agitators, interpersonal friction and
communication breakdown.

Pluralistic perspective

In pluralism the organization is perceived as being made up of powerful and divergent sub-groups,
each with its own legitimate loyalties and with their own set of objectives and leaders. In particular,
the two predominant sub-groups in the pluralistic perspective are the management and trade unions.

Consequently, the role of management would lean less towards enforcing and controlling and more
toward persuasion and co-ordination. Trade unions are deemed as legitimate representatives of
employees, conflict is dealt by collective bargaining and is viewed not necessarily as a bad thing and,
if managed, could in fact be channeled towards evolution and positive change.

Marxist/Radical Perspective

This view of industrial relations looks at the nature of the capitalist society, where there is a
fundamental division of interest between capital and labour, and sees workplace relations against this
history. This perspective sees inequalities of power and economic wealth as having their roots in the
nature of the capitalist economic system. Conflict is therefore seen as inevitable and trade unions are
a natural response of workers to their exploitation by capital. Whilst there may be periods of
acquiescence, the Marxist view would be that institutions of joint regulation would enhance rather
than limit management's position as they presume the continuation of capitalism rather than challenge
it. There are two variants of this view - the pessimist view propounded by Lenin, Trotsky and Michels
and the optimist view propounded by Marx and Engels