AGREEMENTS IN RESTRAINT OF TRADE DEFINITION In Petrofina

AGREEMENTS IN RESTRAINT OF TRADE

DEFINITION • In Petrofina (Gt. Britain) Ltd v Martin And Another [1966] 1 All ER 126 , Lord Diplock said: • “A contract in restraint of trade is one which a party (the covenantor) agrees with any other party (the covenantee) to restrict the liberty in the future to carry on trade with other persons not parties to the contract in such manner as he chooses……”.

TYPES Types of contracts where the restraint may exist: 1. 2. 3. Contracts of employment between employer & employee Contracts between vendor and purchaser for the sale of the goodwill of a business Contracts between partners : • prior to dissolution of partnership, and • during the continuance of the partnership 4. Other commercial contracts.

POSITION UNDER THE CA 1950 • S. 28 : Every agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, is to that extent void.

3 EXCEPTIONS • Exception 1 saving of agreement not to carry on business of which goodwill is sold • Exception 2 saving of agreement between partners prior to dissolution • Exception 3 saving of agreement between partners during continuance of partnership

Q : HOW TO INTERPRET S. 28? • A strict interpretation of S. 28 would render all covenants in restraint of trade void even if the covenants in question were reasonable.

CASE-LAW • The Supreme Court of India in the case of Superintendence Company of India (P) Ltd v Krishnan Murgai AIR 1980 SC 1717 considered in detail the scope of S. 27 of the Indian CA ( =S. 28 Malaysian CA).

SUPERINTENDENCE COMPANY OF INDIA (P) LTD V KRISHNAN MURGAI • The SC held that the position under S. 27 was different from that under the common law.

SUPERINTENDENCE COMPANY OF INDIA (P) LTD V KRISHNAN MURGAI • “A contract, which has for its object a restraint of trade, is prima facie, void. S. 27 of the CA is general in terms and unless a particular contract can be distinctly brought within exception 1 there is no escape from the prohibition. . ”

MADHUB CHUNDER V RAJCOOMAR (1874) BENG LR 76 • the court held that every covenant in restraint of trade was void under S. 27.

WRIGGLESWORTH V ANTHONY WILSON [1964] MLJ 269. • Hasim J held that, under S. 28, English decisions relating to restraint of trade were not relevant as all covenants in restraint of trade were void under S. 28; test of reasonableness could not be applied in such cases.

WRIGGLESWORTH V ANTHONY WILSON • The plaintiff is an advocate and solicitor and is the sole proprietor of the legal firm of "Wrigglesworth & Company" Kota Bharu, Kelantan. • The defendant is an advocate and solicitor and is the sole proprietor of the legal firm of "Wilson & Company" Kota Bharu, Kelantan. • 20 Sep 1962 the defendant entered into an agreement of service with the plaintiff's firm. • 7 Dec 1963 the plaintiff agreed to discharge the defendant from the terms and obligations of the said agreement with effect from 31 December 1963.

WRIGGLESWORTH V ANTHONY WILSON • Clause 8 of the said agreement stipulated that the defendant shall not for a period of two years after the termination of his engagement by the plaintiff practise as or carry on the business or profession of an advocate and solicitor within a radius of five miles from Kota Bharu Town without first obtaining the written consent of the plaintiff. • Such written consent has not been given by the plaintiff.

WRIGGLESWORTH V ANTHONY WILSON • The plaintiff claims an injunction to restrain the defendant from practising or carrying on the business or profession of an advocate and solicitor within a radius of five miles from Kota Bharu, Kelantan until 31 December 1965.

JUDGMENT : • “In my opinion this case should be decided on the interpretation of s. 28 of the Contracts (Malay States) Ordinance, 1950. . . With great respect I do not think the English cases are applicable as the Contracts (Malay States) Ordinance, 1950, is not based on the English law of contract. Section 28 is quite clear.

JUDGMENT • Except in respect of the three exceptions, every agreement by which anyone is restrained from exercising a lawful profession is to that extent void. The defendant is an advocate and solicitor and can lawfully practise his profession in Malaya. Therefore, in my opinion, any agreement to restrain him from exercising his lawful profession is void. …that the distance and place in respect of the restraint are irrelevant. ”

SCHMIDT SCIENTIFIC SDN BHD V ONG HAN SUAN [1997] 5 MLJ 632 • the court held that, to restrain employees from using, disclosing and/or divulging confidential information and/or trade secrets of their former employers to their detriment, is not a restraint of trade. • Hence, the allegation of restraint of trade failed.

NEGATIVE COVENANTS/EXCLUSIVE SERVICE CONTRACTS • Negative covenants operates during the period of the employment contract, ie when the employee is bound to serve the employer exclusively.

NEGATIVE COVENANTS/EXCLUSIVE SERVICE CONTRACTS • Rule such covenants are not regarded as restraint of trade, hence not caught by S. 28.

POLYGRAM RECORDS SDN BHD V THE SEARCH [1994] 3 MLJ 127 • Visu Sinnadurai J held that S. 28 was only applicable to cases where a person was restrained from carrying on his trade or profession in the postcontract period and not during the currency of the contract.

POLYGRAM RECORDS SDN BHD V THE SEARCH [1994] 3 MLJ 127 • The covenant whereby the defendants undertook to provide exclusive recording rights to the plaintiff during the currency of their recording contract, is not a covenant in restraint of trade and is therefore not rendered void under S. 28 of the Act.

NAGADEVAN A/L MAHALINGAM VS MILLENNIUM MEDICARE SERVICES [2010] – CIVIL APPEAL NO: J-03(IM)-95 -09 • “No partner shall without the written consent of the Managing Partner… set up any medical practice within three (3) years after ceasing to be a partner within a radius of 15 KM from any partnership clinic as medical practitioner either by himself or as a partner or employee of any person or company • Issue 1: Is this amounting to a Restraint to Trade under section 28 CA? • Issue 2: If yes, does it fall within the ambit of Exception 2?

POSITION UNDER ENGLISH LAW • All contracts falling within the doctrine are contrary to public policy and prima facie void, unless they can be regarded as reasonable as between the parties and as regards the public interest.

REASONABLE? • The burden of proving that, as between the parties, the restraint is reasonable, lies on the promisee; • the burden of proving that, as far as the public interest is concerned, the restraint is unreasonable, lies on the promisor.

REASONABLENESS • Reasonableness is considered as at the time of the agreement. • The restriction must be reasonable as regards both area and duration.

FITCH V DEWES [1921] AC 158 • A life-long restraint on a solicitor’s managing clerk not to work within 7 miles of Tamworth was held to be reasonable in the circumstances.

RATIONALE OF THE JUDGMENT: • The covenant was held to be valid because the former clerk, if allowed to practise in the area, might severely affect the practice of his former employer if he utilised his knowledge of clients and their affairs to attract them as his own clients. • [NOTE: But this case is exceptional and may not be followed today. ]

NORDENFELT V MAXIM NORDENFELT GUNS & AMMUNITION CO LTD [1894] AC 535 • The House of Lords states and applies the basic rules. • Facts: • Nordenfelt was an armaments* manufacturer who sold his business to a company. [*military weapon]

NORDENFELT V MAXIM NORDENFELT GUNS & AMMUNITION CO LTD [1894] AC 535 • As part of the sale he agreed to the following restraint: that he would not • ‘. . . for twenty-five years. . . engage, except on behalf of the company, either directly or indirectly, in the trade or business of a manufacturer of guns, gun mountings or carriages, gunpowder, explosives or ammunition or in any business competing or liable to compete in any way with that for the time being carried on by the company’.

NORDENFELT V MAXIM NORDENFELT GUNS & AMMUNITION CO LTD [1894] AC 535 • Since the business was worldwide, the restraint, if valid, was also worldwide. • The House of Lords laid down the following principles: • A restraint of trade clause is not void but only prima facie void. That means that the burden of proof lies on the party seeking to uphold the clause to show that it is valid. If that party fails to discharge the burden the clause is void.

NORDENFELT V MAXIM NORDENFELT GUNS & AMMUNITION CO LTD [1894] AC 535 • The party seeking to uphold the clause discharges the burden of proof by showing that the restraint is reasonable in the interests of the parties and in the interests of the public.

NORDENFELT V MAXIM NORDENFELT GUNS & AMMUNITION CO LTD [1894] AC 535 • In Nordenfelt the House of Lords applied these tests as follows. • “In order to show that the clause was reasonable between the parties it had to be shown that the clause protected a legitimate interest. ”

NORDENFELT V MAXIM NORDENFELT GUNS & AMMUNITION CO LTD [1894] AC 535 • The House held that the clause did reasonably protect the company’s proprietary interest except that the final phrase (‘. . . any business competing or liable to compete in any way with that for the time being carried on by the company’) imposed an unreasonable restriction on Nordenfelt.

NORDENFELT V MAXIM NORDENFELT GUNS & AMMUNITION CO LTD [1894] AC 535 • His expertise and reputation was in armaments. If he became an antique dealer, and the company later diversified into antiques then, read literally, the clause could restrain him from practising his new trade.

NORDENFELT V MAXIM NORDENFELT GUNS & AMMUNITION CO LTD [1894] AC 535 • The House held that this part of the clause was merely to protect the company from free competition, which was not a legitimate interest. Nevertheless the phrase could be severed from the rest of the clause, which was upheld as valid.

REASONABLENESS UNDER CA 1950 • ‘reasonable’ is relevant to Malaysian law context within the purview of Exception 1 to s. 28 CA. . • “provided that such limits appear to the court reasonable, regard being to the nature of the business. ”

PARTNERSHIP AGREEMENTS • The principles also apply to clauses in partnership agreements which restrict the future employment of partners who leave the partnership. • Such agreements fall in between contracts for the sale of a business and contracts of employment.

CONTRACTS OF EMPLOYMENT • Whereas sales of a business are usually negotiated between equals, employees may, because of their weak bargaining position, be unable to resist a restraint. • Such clauses usually restrict the type and location of employment which may be entered into by the employee after the employee has left the employer’s business.

CONTRACTS OF EMPLOYMENT • If the employee is wrongfully dismissed then he or she is no longer bound by the clauses in restraint of trade even if they are valid.

CONTRACTS OF EMPLOYMENT • In determining what interests an employer may legitimately protect, the courts have limited them to two: • i) trade secrets and • Ii) preventing an employee from soliciting the customers of the business.

THOMAS COWAN & CO LTD V ORME [1961] MLJ 41 (SINGAPORE CASE) • the court held that a covenant, which was reasonable between the parties, was void on the ground that the covenant was unreasonable in the interest of the public.

THOMAS COWAN & CO LTD V ORME • The action was brought to restrain the defendant, a former employee of the plaintiffs, from continuing to commit a breach of a restrictive term contained in a written agreement. • By that agreement it was provided that the defendant:

THOMAS COWAN & CO LTD V ORME • “On leaving the services of the employer for any reason whatsoever either pursuant to this Agreement or on any breach of this Agreement shall not carry on the business of White Ant Exterminator or Fumigator anywhere in the Island of Singapore either by himself or in partnership with others. .

THOMAS COWAN & CO LTD V ORME • . . nor shall he take employment with any person, firm or corporation carrying on the business of White Ant Exterminators or Fumigators or any such similar business until the period of three years has expired from the date of the employee leaving the services of the employer. ”

THOMAS COWAN & CO LTD V ORME • The court took into consideration that the plaintiff company was the only firm of fumigators in Singapore. • The court came to the conclusion that although the covenant was reasonably necessary for the protection of the plaintiff’s business with regard to space and time as well as the nature of the defendant’s employment, . .

THOMAS COWAN & CO LTD V ORME • . . there should be more than one firm of fumigators in Singapore and that to prevent the defendant from carrying on as a fumigator would be unreasonable in reference to the interest of the public

OTHER COMMERCIAL AGREEMENTS • Hua Khiow Steamship Co Ltd v Chop Guan Him (1930) 1 MC 175 • The court in interpreting S. 28 took a liberal attitude that these covenants are not in restraint of trade. • A strict view of the section would have the effect of invalidating most commercial agreements.

HUA KHIOW STEAMSHIP CO LTD V CHOP GUAN HIM • The plaintiffs contracted with the defendant and several other traders to charge them at a lower rate in consideration that they would ship all their goods and produces from Muar to any port to which the plaintiff had a steamer running, by the steamers of the plaintiffs.

HUA KHIOW STEAMSHIP CO LTD V CHOP GUAN HIM • The contract contains a covenant that if the defendant or any of the others transported their goods through another company, they would be disentitled to claim rebate, which otherwise they would have been entitled to.

HUA KHIOW STEAMSHIP CO LTD V CHOP GUAN HIM • They would also become liable to the plaintiffs to pay three times the amount of the weight of the goods shipped by them in breach of the agreement.

HUA KHIOW STEAMSHIP CO LTD V CHOP GUAN HIM • The defendant breached the agreement and the plaintiffs claimed for the recovery of the sums of money due. • The court held that the covenant was not in restraint of trade.