Restraint of Trade Clauses- Freedom of Contract-

Law of Contract

Assignment Question:

The difficulty which is apparent through nearly all the reported cases is the reconciliation of two principles…(1) that of freedom of contract, by which a person is held bound by an agreement into which he had deliberately entered and (2) that of freedom of work by which an employer is prevented from restraining a servant from exercising his energies in work for himself or others to an extent greater than is necessary for the protection of the employer.” Per Palmer A. J. African Lakes Corporation v Murrey (1947) SLRNR 166

Is it valid to talk of reconciliation of the two principles rather than a sacrifice of either?

Student Response:

The Law of Contract encapsulates two principles of law that prima facie appear to be in conflict: One being freedom of contract, which entails a freedom exercised by parties to a contract to decide on what terms and obligations will be therein. While the other is freedom of work, which holds that an employer is prevented from holding back a servant from exercising his energies in work for himself or others. Reconciling these two principles is the role of the courts. Although the principle of freedom of contract exists on the one hand, the courts should not be seen as to enforce illegal contracts on the other. [1] A conflict may arise if a contract which an employee deliberately entered, restrained him to work for himself or someone else after leaving the realm of his employer. In this circumstance, the issue to the court becomes of profound interest as to whether an employer can show that the restraint was to his own protection.[2] If that be the case, a reconciliation of the two principles would be eminent. If not, it must suffice that the restraint be done away with, for the courts cannot enforce illegal contracts.

People are free to contract with others and in doing so, accept to be legally bound by the obligations therein; this is what is known as Freedom of Contract. The classical Law of Contract is based on that principle, which means that the parties are free to decide for themselves the terms of a contract and it is the role of the courts to give life to the agreement that they have reached.[3] Assuming that the parties have satisfied the requirements of a valid contract, it falls on the province of the courts to enforce it. It has always been a principle of law that the courts shall not interfere with the terms or obligations of parties in a contract. Simply stated, this means that it is not the duty of the courts to decide on the fairness of contractual terms, for that it is up to the parties to decide. Professor Collins actually said that, ‘a system of contract law committed to freedom of contract must reject controls over the fairness of contracts.’[4] However, the Courts do often step in and arbitrate on contracts that are against public policy or statute and have a propensity of either being illegal or void. An example of such a contract is a contract made with minors, drunken persons or mentally-disabled persons. Another example is a restraint of trade clause that is neither justifiable nor reasonable. Such clauses are often construed to inhibit competition and often receive a considerable degree of hostility from the courts. The learned authors Catherine Elliot and Frances Quinn actually said that, ‘The court must be satisfied that the party making the restriction actually needs to protect their interests. The only legitimate interests employers may seek to protect are their relationship with customers and their trade secrets. Restrictions designed simply to prevent competition will not be upheld.’[5] In Zambia, Section 7(1) of the Competition and Fair Trading Act[6]specifically prohibits any ‘agreements, decisions and concerted practices’ that discourage competition.

Diplock LJ defines a restraint of trade clause in the case of Petrofi na (Great Britain) Ltd v Martin[7] as ‘one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in the future to carry on trade with other persons not parties to the contract in such a manner as he chooses.’ The case of Herbert Morris Ltd v Saxelby[8] gave support to the position of law that a restraint of trade clause will not have efficacy if it allows the person relying on it to have a special advantage.  However, the courts are aware that some of these clauses may be reasonable and henceforth enforceable. This serves as an exception to the fact that contracts that involve restraint of trade clauses are prima facie void. For example, in the case of Forster & Sons v Suggett[9], the court gave support to a restraint of trade clause that prevented an employee from working in the glass industry. This is because the employee had worked for a period of five years and had garnered important trade secrets. At the heart of the discussion is the question as to what exactly justifies a restraint of trade clause. The reasons postulated are that it must be in the interest of both parties and it must not be contrary to public policy.[10] For it to be in the interest of both parties, the Restraint must be reasonable. The courts generally consider the following: the interest of the employer, the scope of restraint, the area of restraint, and the length of time espoused by such a restriction.[11] The scope of the restraint must not be too wide as to afford the employer an opportunity to take advantage of the clause other than is necessary for his own protection. In the case of Home Counties Dairies Ltd v Skilton[12]the court had initially held that the restraint clause was too wide and therefore invalid. On appeal however, the superior court held that the scope was good enough to satisfy the justification because the restraint clause simply prohibited the milkman from garnering his former employer’s customers. Furthermore, the restraint clause must be in the interest of the employer. By this we mean it must be for the employer’s protection. As previously stated, this means trade secrets that if exposed to competitors, would be injurious to the employer. This of course does not apply to personal knowledge or skills that an employee acquired when he was under the employment. It is up to the employer to prove that the personal knowledge or skills that an employee acquired were actually trade secrets. To buttress this point, the case of Printers and Finishers Ltd v Holloway[13]is illustrative in that the court held that a restraint of trade clause can be actionable were an employer proves that the personal knowledge or skill that an employee has acquired during his employment, is actually confidential information.

Now that we have established the circumstances that could justify a restraint of trade clause, can we reconcile these principles? It is my submission that one principle is an extension of the other. Freedom of Contract entails that a party deliberately chooses to be bound to an employment contract. It is established that all commercial contracts restrain trade on the employee in the sense that one person binds another to work solely for him and not others during the time of his employment. The courts, however, don’t regard such contracts with the same level of scrutiny as those that contain restraint of trade clauses. The difference lies in the legal status of the two; whereas ordinary commercial contracts are not illegal, contracts that are designed to restrict an employee’s ability to work specifically to inhibit competition are illegal. The only way, therefore, that a restraint of trade clause in a contract can survive is if it’s justified in the manner aforementioned i.e. it is strictly to the protection of the employer and does not give him an unfair advantage.  To put it in broad terms, restraints are unreasonable if they fail to achieve the contract’s fundamental purpose.[14] If they do achieve that purpose, the courts find it easy to reconcile the principles by giving effect to the restraint clause in which an employee deliberately chose to be bound. The reconciliation of the principles happens because an employee deliberately chose to be bound by a restraint clause (which satisfies freedom of contract) that is exclusively to the protection of the employer (meaning it’s not illegal or void, so the courts can enforce it) and by extension, the employer restricts his employee in that regard as an exercise of his contractual rights and obligations.

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BIBLIOGRAPHY

STATUTES

Competition and Fair Trading Act, Chapter 417 of the Laws of Zambia

CASES

Forster & Sons v Suggett (1918) 35 TLR

Herbert Morris Ltd v Saxelby [1916] 1 AC 688

Petrofi na (Great Britain) Ltd v Martin [1966] Ch 146, 180

Printers and Finishers Ltd v Holloway [1965] 1 WLR 1

BOOKS

Beatson J & Cartwright J, Anson’s Law of Contract (29thedn, Oxford University Press 2010)

Cheshire, Fifoot & Furmston’s, Law of Contract(13thedn, Butterworths 1996)

Collins, The Law of Contract (4thedn, Butterworths 2003)

Elliot C & Quinn F, Contract Law (7thedn, Pearson Education Ltd 2009)

McKendrick E, Contract Law: Text Cases and Materials (5thedn, Oxford University Press 2010)

Suff M, Essentials of Contract Law (2ndedn, Cavendish Publishing ltd 1997)

ARTICLES

S A. Smith, ‘Reconstructing Restraint of Trade’ (1995) 15 Oxford Journal of Legal Studies


[1] M Suff, Essentials of Contract Law(2ndedn, Cavendish Publishing ltd 1997) 90-91

[2] Cheshire, Fifoot & Furmston’s, Law of Contract(13thedn, Butterworths 1996)

[3] E McKendrick, Contract Law: Text Cases and Materials (5thedn, Oxford University Press 2010) 11

[4] Collins, The Law of Contract (4thedn, Butterworths 2003)270

[5] C Elliot & F Quinn, Contract Law(7thedn,Pearson Education Ltd 2009)237

[6] Chapter 417 of the Laws of Zambia

[7] [1966] Ch 146, 180

[8] [1916] 1 AC 688

[9] (1918) 35 TLR

[10] J Beatson & J Cartwright, Anson’s Law of Contract(29thedn, Oxford University Press 2010)399

[11] Ibid 403-405

[12] [1970] 1 WLR 526

[13] [1965] 1 WLR 1

[14] S A. Smith, ‘Reconstructing Restraint of Trade’ (1995) 15 Oxford Journal of Legal Studies 569