Restrictive Covenants - PLS I - Week 8 - 2024 PDF

Restrictive Covenants Welcome to PLS I – Week 8 with Dr Lorna Gillies Restrictive Covenants : An Introduction Our focus: To what extent can an employer or the purchaser of a business protect their economic and business interests by using a contract term to restrict the activi...

Restrictive Covenants Welcome to PLS I – Week 8 with Dr Lorna Gillies Restrictive Covenants : An Introduction Our focus: To what extent can an employer or the purchaser of a business protect their economic and business interests by using a contract term to restrict the activities of a former employee or the seller of a business?  Core Points to Consider Restrictive Covenant Restraint of trade Why? Balance  Example What you cannot do You may not practice as a solicitor Where you cannot do it You may not practice as a solicitor within 20 miles Time – Length of restriction You may not practice as a solicitor within 20 miles within the next five years  Starting Point A restrictive covenant is prima facie void and unenforceable Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd AC 535 per Lord Macnaghten “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. “  Three Requirements from Nordenfelt A restrictive covenant is prima facie void and unenforceable Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd AC 535 Is the covenant … necessary to protect legitimate interests? And reasonable between the parties? And In the public interest?  Reasonableness and Adequacy Nature of restriction – e.g., activity, geographical extent, duration Nature of employment – junior or senior Bargaining position “The fact that, on the face of it, a party has willingly signed… has nothing to do with the question as to whether the restriction is or is not enforceable as a matter of public policy” Sundolitt v Addison CSIH 15 Ground Rules from Sundolitt v Addison Sundolitt v Addison CSIH 15 Has the term been validly incorporated? Does the term impose a restriction on one party over another party who seeks to enforce the restriction? Should the restriction be enforced?  Reasonableness and Public Policy Bridge v Deacons 2 WLR 837 per Lord Fraser of Tullybelton Sale of Business "When a business is sold, the vendor, who, it may be, has inherited it or built it up, seeks to realise this piece of property, and obtains a purchaser upon a condition without which the whole transaction would be valueless. He sells, he himself agreeing not to compete; and the law upholds such a bargain, and declines to permit a vendor to derogate from his own grant. Public interest cannot be invoked to render such a bargain nugatory: to do so would be to use public interest for the destruction of property. Nothing could be a more sure deterrent to commercial energy and activity than a principle that its accumulated results could not be transferred save under conditions which would make its buyer insecure.”  Reasonableness and Public Policy Employment – Herbert Morris v Saxelby AC 688 per Lord Shaw of Dunfermline at 714 "In the case of restraints upon the opportunity to a workman to earn his livelihood a different set of considerations comes into play. No actual thing is sold or handed over by a present to a future possessor. The contract is an embargo upon the energy and activities and labour of a citizen; and the public interest coincides with his own in preventing him, on the one hand, from being deprived of the opportunity of earning his living, and in preventing the public, on the other, from being deprived of the work and service of a useful member of society."  Restrictive Covenants and the Law Bridge v Deacons 2 WLR 837 Ascertain the legitimate interests which the employer is entitled to protect THEN test whether the particular restraint is more than adequate for that purpose. Restrictive Covenants and the Law – Legitimate Interests (1) What interests can be protected? Bluebell Apparel Ltd v Dickinson 1978 SC 16 2-year world-wide restriction Confidential information? Implied terms in contract of employment Trade secrets? Business methods and organisation? Restrictive Covenants and the Law – Legitimate Interests (2) Business connection Competition vs poaching clients Scottish Farmers Dairy Co (Glasgow) Ltd v McGhee 1933 SC 148 2-year one-mile radius restriction against competition Restrictive Covenants and the Law - Severability Tillman v Egon Zehnder Ltd UKSC 32 “[not] directly or indirectly engage or be concerned or interested in any business carried on in competition with…” In Scotland, a two-part test:- Can the clause be removed without modifying what remains? (“the blue pencil test”) Does removal alter the contract so that it is no longer the sort of contract entered into by the parties? Restrictive Covenants – Example Case Stewart v Stewart 1899 1 F 1158 Photography business in Elgin Restrictive Covenant – within 20 miles of Elgin Stewart 2 (assistant) set up business in competition Stewart 1 (former employer) sought to interdict him Discuss with a neighbour: was the restrictive covenant reasonable to protect Stewart 1’s legitimate interests? Restrictive Covenants – Further Example Case Dallas McMillan & Sinclair v Simpson 1989 SLT 454 Partnership agreement – Restrictive covenant – within 20 miles of Glasgow for 5 years. Discuss with a neighbour – was the restriction reasonable? Restrictive Covenants – Final Example Case Prosoft Resources v Griffiths 1999 SLT 1255 Employment contract – Restrictive covenant – Working for anyone else in the Highlands if it involved disclosing or using confidential business information Obtained a job as a consultant to a client of Prosoft The court refused interdict Discuss with a neighbour – why do you think that the court made that decision?