Legal Purpose

Question 1

What is legal purpose?

Answer 1

• A contract will only be valid if the purpose of the contract is legal and not immoral and the contract as a whole is not against public policy.
• As a result, the courts will often refuse to enforce a contract which is considered to be in restraint of trade because it is seen to be against public policy.
• A contract in restraint of trade is one where one person is stopped from carrying on employment or a business for a certain period of time.

Question 2

What are the clauses in restraint of trade?

Answer 2

□ Contracts between Employer and Employee

□ Contracts for the Sale of a Business

□ Solus Agreements (contracts between supplier and retailer)

Question 3

□ Contracts between Employer and Employee

Answer 3

® An employer will often make it a condition of employment that if the employee leaves their job, he/she will not work for a competitor within a certain distance of the present employer for a specified period of time.

® On the whole the only reason why employers insert such clauses is to prevent an employee with particular talent from competing with their business.

® The courts will not generally therefore uphold such arrangements.

® If the employer is genuinely protecting a proprietary interest such as a trade secret however, the court is more likely to declare that the clause is valid.

Question 4

Contracts for the Sale of a Business

Answer 4

® A business may be sold on condition that the seller will not set up a similar business during a fixed period and/or within a specified distance.

® Once again the courts will only uphold such agreements providing that the terms are reasonable.

® What is reasonable will depend upon the particular circumstances of each case.

Question 5

□ Solus Agreements (contracts between supplier and retailer)

Answer 5

® A solus agreement is where a trader agrees to be supplied by only one company

◊ e.g. a petrol station agrees to sell only Esso petroleum, a public house agrees to sell only Carlsberg beers etc.

® Such agreements are often entered into in return for a loan to carry out improvements to the premises.

® Once again the courts consider such restraints to be illegal unless they are reasonable.

Question 6

Facts to consider to see if a clause is reasonable

Answer 6

§ The Length of the restraint
- (how long it will last for?)

§ The Area covered
- (this is less relevant today as most businesses operate via the internet so can operate anywhere, but it may be relevant e.g. selling a small local business – shop/café etc)

§ The Relative Bargaining Power of the parties
- (is one party in a more dominant position and able to control the situation? If so, the clause is less likely to be reasonable)

§ How wide is the restriction
- (ie. is the scope of the restriction appropriate or is it excessive?)

Question 7

Employer/Employee Contracts: Cases

Answer 7

□ E.g. ATTWOOD V LAMONT 1920

E.g. FITCH V DEWES 1921

□ E.g. FORSTER & SONS V SUGGETT 1918

Question 8

What are contracts in restraint of trade?

Answer 8

• Contracts between Employer and Employee
  E.g. Proactive Sports v Rooney 2012
• Contracts for the Sale of a Business
  E.g. BRITISH REINFORCED CONCRETE V SCHELFF 1921
• Solus Agreements (contracts between supplier and retailer)
  ○ E.g. NORDENFELT V MAXIM NORDENFELT GUNS & AMMUNITION CO 1894

Question 9

Severance

Answer 9

• The fact that a restraint clause is void does not prevent the rest of the contract from being valid.
• Furthermore, it may be possible for the court to sever (cut out NOT alter) the unreasonable aspects of the restraint clause so that the remainder of the restraint can then be enforced.

E.g. GOLDSOLL V GOLDMAN 1915
○ However, by the use of severance, the courts would remove references to
§ ‘real jewellery’ and
§ ‘all areas apart from the UK’

Question 10

○ The use of severance was considered in Attwood v Lamont

Answer 10

§ but in that case the court felt that it was not appropriate as the clause covered the full range of activities which the Claimant’s business was engaged in so it was not seen as appropriate to remove reference to specific parts of the business which were actually in existence.

Question 11

Taking a breach of contract case to court

Answer 11

To win the case a Claimant must do the following:

1. Prove that a contract exists [offer, acceptance, consideration, intention to create legal relations, capacity, legal purpose]
2. Prove that the contract has been breached
   [one of the terms (promises) has not been fulfilled]
3. Request a remedy
   [damages, injunction, specific performance]