Contracts or Covenants for the Restraint of Trade - Case Study Example

The question deals with the issue of restraint of trade covenants in contracts. A contract or a covenant in restraint of trade is an undertaking whereby one party agrees to restrict his freedom to trade or his freedom to conduct his profession or business in a particular locality for a specified period of time.1 Whilst the courts have generally honored the freedom of parties to contract, in the case of the abovementioned covenants they have felt the need to impose judicial control. The reasoning behind this interference was best explained by Lord Reid in the case of Schroeder Music v Macaulay (1974) 1 WLR 308 as follows: “The public interest requires in the interest of both the public and the individual that everyone should be free so far as practicable to earn a livelihood and to give to the public the fruits of their particular abilities” All contracts or covenants for the restraint of trade are prima facie void. This however is the general rule with the courts being willing to enforce the same in certain situations. This was laid down in the case of Nordenfelt v Maxim Nordenfelt( (1894) AC 535 by Lord Macnaughten who stated that “The public have an interest in every person’s carrying on his trade freely; so has the individual. All interference with the individual liberty of action in trading, and all restraints of trade 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 the only justification, if the restraint 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 is in no way injurious to the public...” It is in this light therefore that Dr. Smith’s contract of employment needs to viewed. Prima facie section 10 of her employment contract is void and her bosses at BUPA will not be able to rely on it. If however, they can prove that they fall within one of the exceptions that the court has laid down they will be able to successfully rely on the said action and prevent Dr. Smith from starting her new job. For Dr. Smith’s bosses to succeed it is not enough that they show that the clause is reasonable between the parties. They must also prove that the clause is reasonable in the public interest. It is noteworthy that The burden of showing that a covenant is in the interests of the parties lies with the employer. The onus of proving that it is contrary to the public interest lies with the employee: Kores Manufacturing Company Limited v Kolok Manufacturing Company Limited [1959] (CA) Ch D 109.2 We will look at the first aspect in detail over the next few paragraphs. In deciding whether or not the section 10 of the employment contract in question is reasonable between the parties the courts will look at (a) whether the clause protects a legitimate interest of the employer and (b) is whether or not the clause is reasonable in terms of subject matter, locality and duration. When looking at whether a restraint of trade clause protects the legitimate interest of the employer the court has looked to see if the employer has “ some proprietary right, whether in the nature of a trade connection or in the nature of trade secrets for the protection of which such a restraint is…reasonably necessary”.3 The courts have further said however that an employer is not entitled to protect himself against the use of the “personal skill and knowledge” acquired by the employee in the course of the employer’s business. Such skills belong to the employee and he is free to exploit them in the market place.4 In the Dr. Smith’s case the BUPA bosses will succeed in their action if they are able to show that they would lose all their patients if Dr. Smith moves to Sunderland General Hospital. In the case of Strange v Mann it was held that a list of clients must be protected if the employer is to continue business. The above-mentioned case of Herbert Morris v Saxelby however held that it is not enough to show that the employee had contact with clients. It must also be shown that he was in a position to influence those clients so that upon leaving he will be a threat to the employer’s business. As Dr. Smith will be moving into a more specialized area of medicine it is unlikely that her former employers will be able to prove that restraining her from working at the new hospital results in protecting a legitimate interest of theirs. Even if the BUPA bosses succeed in proving the above they will have to further prove that section 10 of the employment contract is reasonable in terms of subject matter, locality and time (Nordenfelt v Maxim Nordenfelt). An employer is not allowed to restrain an employee from carrying on a business which is different from that in which he was employed. Whilst Dr. Smith will be working in a more specialized area at the Sunderland General Hospital, she will still be working in the area of medicine. However, section 17 seems to be unnecessarily wide as it prevents Dr. Smith from working for any medical practice or hospital of any kind for five years and within a twenty-mile radius of the City of Sunderland. The restriction from working in any medical practice will be most probably viewed unfavorably by the courts. The clause however does not seem to be unreasonable as to time since it limits her from working for only five years. It does not as was said in Herbert Morris “ force her to begin life afresh, as it were, and deprive him of the means of supporting himself and his family”. The section however does seem to be unreasonable as to the area it covers. IN the case of Mason v Provident Clothing and Supply Co5 a clause which prevented an employee from working in a similar business within 25 miles of London was held to be unreasonable. This case however was decided nearly 100 years ago and it remains to be seen if the courts would take the same view now given the advancement in transportation infrastructure and technology. As mentioned above it is not only enough to show that the clause in question was reasonable between the parties. It also needs to be shown that it satisfies the test of being reasonable when viewed in terms of public policy. The onus of proving that the clause is contrary to public policy is on Dr. Smith but she should be warned that “the courts are extremely reluctant to conclude that an agreement which is reasonable between the parties is unenforceable because it is contrary to the interests of the public, especially in the case of contracts of employment”. This does not however mean that the courts have never decided against restraint of trade covenants on the grounds of public policy. IN the case of Fitch V Dewes6 the court decided in favour of a senior solicitor when he imposed a covenant on a junior solicitor that barred him from establishing himself as a solicitor for a period of 3 years for a 7 mile radius. The court upheld the agreement as valid on the basis that it was in the interest of the public to encourage senior solicitors to train juniors by affording this protection to them as they would be otherwise reluctant to train juniors, which in turn would be injurious to the interest of the public. As Dr. Smith will obviously be seeing a larger number of patients at the new hospital AND have the freedom of conducting experimental research it would be against public policy to prevent her from doing so. This is further accentuated by the fact that we are told that she is one of the leading authorities in her field. The advancement in her career and experimental research would clearly benefit the public and therefore restrainment of the same by BUPA would be against public policy. It can be concluded therefore that BUPA will find it difficult to rely on s.10 of Dr. Smith’s contract to seek an injunction and damages against her. Read More