April ’05 – Q8 – Restraint of Trade

April ’05 – Q8 – Restraint of Trade

If a contract conflicts with the criminal law or other important legal principles, the court may not give full effect to the contract, or it may give no effect to it at all. The court itself must raise the point even if neither party wants it to happen. The law does its up most to enforce commercial contracts; this involves balancing different policies especially where the illegality is trivial.

The effect of illegality can be that all remedies are denied, some are partly denied (severance), non-contractual remedies are allowed.

Common law illegality can occur in many situations including contracts in restraint of trade. The common law rules are antique nonetheless they remain in full force. However McDermott has suggested that since uncertainty pervades the area it is advisable to plead both the common law and statutory rules.

The doctrine invalidates contracts not to engage in trade except where the contract can be shown to be reasonable from both the parties’ point of views. The usual case is a contract directing an apprentice not to compete with his master. However, some contracts only indirectly restrain trade and it is not fully established whether the doctrine applies to them. Kerry Co-op – An Bord Bainne – must be express covenant to restrain trade.

While the law is unclear it seems that the doctrine will not apply to minor exclusive dealing contracts, Murphy v O’Donovan – entered into the contract freely. Or promises by buyers of land not to trade on the land; Sibra Building v Landgrove. The restraint is invalid unless it can be shown to be reasonable between the parties and restraint reasonable from the point of view of the public.

All restraints within the doctrine are invalid unless it can be shown that:

• The restraint is reasonable as between the parties, and
• The restraint was reasonable from the point of view of the public.

Maken v O’Reilly – as to the public interest it was for the benefit of Irish horse breeders, as for the position between the parties the plaintoff’s sacrifice was considered relatively minor. It can apply in instances of employment, sale of business and exclusive dealing contracts; it doesn’t apply if someone is starting up a trade for the first time. Clearly for the purpose of this question the instance of employment is relevant.

Any substantial interference with freedom to work or freedom to trade may be within the doctrine. In the cases most attention is given to considerations of reasonableness – appeals to the public interests are rarely successful.

The burden of proof as between the parties must be affirmatively proved; it is on the side saying that the agreement was fair, John Orr Ltd. v Orr, however, the burden of proof is reversed if restraint contrary to the public interest is claimed.

Johnston v Cliftonville – restrictions on pay was an interference with liberty. Music cases provide much case law on this area and mainly concentrate on reasonableness as between the parties. Silverstone Records v Mountfield, restraint of trade found due to group and managerial inexperience, and Pahayiotou (George Michael) v Sony, no restraint of trade found as the singer was well advised throughout and had negotiated actively. The music cases show that inexperienced performers are entitled to protection of their interests, but also that, from their record company’s point of view, the rare success has to pay for the many failures.

In ordinary employment cases the courts try and balance the parties’ legitimate interests against each other. A contract cannot forbid ex-employees from using knowledge gained during employment unless the clause protects legitimate employer interests e.g. trade secrets or customer lists. In John Orr the courts applied reasonableness as forbidding one seller from trading anywhere in the world was too restrictive. In Esso v Harpes Garage an exclusive dealership contract was deemed to be unreasonable as it lasted for 21yrs although 5yrs was found to be ok in Continental Oil v Moynihan.

While competition law now governs much of this area it has been noted that the Competition Act, 1991 failed to specifically cover employment agreements.

The effect of illegality is that a contract illegal on its face is completely unenforceable. However, if it merely has an illegal provision it may be cut/severed from an otherwise lawful contract, i.e. simply strike out the unlawful part/clause and leave the rest. Such offence doesn’t render the contract illegal; accordingly the court severs the part that offends. However, the problem is whether internal severance can occur within a clause, i.e. in some instances the clause can be so phrased as to enable the blue pencil to be used to sever those elements that are repugnant. However will severance not occur, Irish courts won’t write anything into the clause Mulligan v Corr. America has a more flexible test.