Week 8: Specific Terms (Restrictive Covenants and Liquidated Damages)

Question 1

Which case judgement highlighted that while by in large Restrictive Covenants are prima facie void, there are special circumstances under which they are legally binding.

Answer 1

Nordenflet v Maxim Nordenfelt Guns and Ammunition.

Question 1

What the three primary considerations when examining a restrictive covenant?

Answer 1

1. Nature of restriction
2. Nature of employment
3. Bargaining Position -

Question 2

What is the two-prong test to evaluate the reasonableness of a restrictive covenant?

Answer 2

1. Blue pencil test
2. Does it fundamentally change the nature of the contract?

Question 3

Which case highlights that if a restrictive covenant is not in the legitimate business interests of the party making the contract - it cannot be enforced.

Answer 3

Dallas McMillan & Sinclair v Simpson

Question 4

What is the purpose of liquidated damages?

Answer 4

To facilitate recovery and restore wronged party to original position.

Question 5

Are penalty clauses enforceable?

Answer 5

No.

Question 6

What was the previous approach on liquidated damages?

Answer 6

Damages also incorporated that which isn’t necessarily compensatory, but instead is punitive.

Question 7

What are the three considerations when determining whether a clause is a penalty clause or liquidated damages?

Answer 7

1. Does the ‘wronged’ party have a legitimate business interest to protect?
2. Is the amount specified exorbitant?
3. Is it a primary/secondary obligation

Question 8

What is a primary obligation?

Answer 8

Essential (Key to the contract)

Question 9

Which cases highlights the current approach on liquidated damages and penalty clauses?

Answer 9

Cavendish and ParkingEye v Beavis.

Question 10

What were the terms of Cavenish’s liquidated damages cause?

Answer 10

Should he breach the restrictive covenant, he would have to retun his shares at a lower price than that which they are valued.

Question 11

What was the judgement given in Cavendish?

Answer 11

The return of shares at a lower price could not be considered exorbitant and was it the legitimate business interests to have Cavendish not compete with them, therefore the clause could not be considered a penalty clause.

Question 12

What was the judgement given in ParkingEye v Beavis?

Answer 12

The £85 penalty was not at the detriment of the appellant, was in the legitimate business interests of ParkingEye, therefore the clause could not be considered unfair, thereby ruling in favour of the defence.

Question 13

Bridge v Deacons

Answer 13

Reasonableness of restrictive covenants.

o Ascertain the legitimate interests which the employer is entitled to protect THEN test whether the particular restraint is more than adequate for that purpose.

Question 14

Blue apparel Ltd v Dickinson

Answer 14

Restrictive Covenant: 2-year world-wide restriction

Question 15

Scottish Farmers Dairy Co (Glasgow) Ltd v McGhee

Answer 15

Restrictive Covenant: 2-year, one-mile radius restriction against competition.

Question 16

Tilman v Egon Zehnder

Answer 16

Restrictive Covenant - removed and remainer of contract enforced.

o ‘Not directly or indirectly engage or be concerned or interested in any business carried on in competition with’
o In Scotland, a two-part test
o Enforceable*: The removal of the words did not constitute a great change and did not change the overall meaning of the contract.
o The court referred to unenforceable parts of post-employment restrictions as legal litter, left for someone else to clear up.
o This reenforces the point that courts tend not to interdict contracts but instead facilitate the execution of a contract.

Question 17

Stewart v Stewart

Answer 17

Restrictive Covenant: Enforceable as seen as in the economic interests of Mr Stewart.

Question 18

Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd

Answer 18

Previous approach on liquidated damages.