McGILL LAW JOURNAL
Volume 21
Montreal
1975
Number 3
Recent Developments in Restraint of Trade
S.D. Heydon*
Every few generations, the common law restraint of trade
doctrine seems to go through a brief period of rapid change: old
rules are destroyed or modified and new ones are developed. Thus,
during Coke’s lifetime the foundations were developed; in 1711
Mitchel v. Reynolds’ unified the ancient materials; in the 1830’s the
rule that adequacy of consideration was irrelevant to reasonableness
was settled;2 and between the NordenfelP case and the First World
War the distinction between general and partial restraints was
abolished and our present law emerged.4 We appear to be in the
middle of another such period at present. Since the House of Lords
decision in Esso Petroleum Co., Ltd. v. Harpers Garage (Stourport),
Ltd.5 there have been a number of decisions by courts throughout the
Commonwealth which have affected every aspect of the doctrine.
In particular, there have been several important Canadian decisions.
The general effect of these decisions has been to widen the scope
of the doctrine considerably. In certain respects, the doctrine has
acquired the capacity to overcome some of the deficiencies of anti-
trust legislation. This article will examine these changes and will
attempt to predict the immediate future of the law.
* Professor, Faculty of Law, University of Sydney.
1 1 P. Wins. 181.
2Hitchcock v. Coker (1837) 6 Ad. and El. 438.
3Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. Ltd. [1894]
4 Mason v. Provident Clothing and Supply Co. Ltd. [1913] A.C. 724; Herbert
A.C. 535.
Morris, Ltd. v. Saxelby [1916] A.C. 688.
B [1968] A.C. 269.
McGILL LAW JOURNAL
[Vol. 21
The restraint of trade doctrine has generally been interpreted as
meaning that restraints of some or perhaps all kinds of trade are
void, unless: a) there exists some legitimate interest of the person
who imposes the restraint, or of the public; and b) the restraint is
not excessive in relation to the need to protect that interest. A
number of issues which arise from this definition will be discussed
in the following sections.
What is Trade?
In an early case, Atkin L.J. stated that the restraint of trade
doctrine “extends further than trade, it undoubtedly extends to the
exercise of a man’s profession or calling”.” It is only recently,
however, that the courts have considered this issue in detail. In
Elford v. Buckley Hardie J. held that rules of the New South Wales
Rugby League which permitted clubs to retain players until payment
of a transfer fee were not in restraint of trade: “…the rules of the
League … do not fall within the category of employment contracts
or other obligation creating transactions or instruments appropriate
“.7 This view was inconsistent
for the application of the doctrine …
with obitei dicta of earlier judgments8 and was soon expressly
overruled by the New South Wales Full Court and the High Court
of Australia in Buckley v. TuttyY In that case, the Full Court stated
that the purpose of the Rugby League was more than sporting. Its
structure had a “financial context and significance which can be
summed up in the word ‘trade’ “.1o The clubs had financial interests
in gaining and retaining pools of players: they not only organized
players but also employed them, and the players were valuable assets
which could in effect be sold for transfer fees:
It is true that the pool of players is not labour in the usual sense because
there is undoubtedly superadded an element of sport and a feeling that
the sport exists over and above the professionalism involved in it. One
should not assume that such feelings do not exist in other areas of
remunerated activity –
teaching, science, art. However, this element…
does not prevent the activity when it is carried on between parties at a
profit to each of them from being described in the blunt language of the
law as trade.”
Hdpworth Manufacturing Co., Ltd. v. Ryott [1920] 1 Ch. 1, 26.
7 [1969] 2 N.S.W.R. 70, 77-8.
SEastham v. Newcastle United Football Club Ltd. [1964] Ch. 413; Blackler
v. New Zealand Rugby Football League (Incorporated) [1968] N.Z.L.R. 547.
9 [1970] 3 N.S.W.R. 463.
10 Ibid., 472.
11 Ibid.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
327
The High Court stressed not so much the activities of the League
and its clubs but rather those of the players. Because the players’
activities helped them to make a living, they were engaged in trade,
whether or not the League and its clubs were so engaged.12 Conse-
quently, it did not matter that the League was largely administered
by unpaid officials and unincorporated associations, or that the
players looked for their main livelihood outside football. In this
respect, the decision extends the meaning of trade beyond what
was decided in Eastham v. Newcastle United Football Club Ltd.”3
where the football association consisted of commercial limited com-
panies employing full time professional players.
The meaning of “trade” was also considered in McGuigan Invest-
ments Pty. Ltd. v. Dalwood Vineyards Pty. Ltd.14 In that case, the
purchaser of land called “Dalwood” covenanted that he would not
use the land for the purposes of a business carried on under any
name of which the word “Dalwood” formed part. The issue, there-
fore, was whether a restriction on the use of a trade name but not
on any particular trade should be considered a restraint of trade. In
Vernon v. Hallam Stirling J. had held that it was not, because:
[the covenantor] may employ his talents, his industry, and his capital in
any useful undertaking he pleases. All that is restrained is the use by him,
in so doing, of a particular name or style.’ 5
A different view was expressed in Hepworth Manufacturing Co. Ltd.
v. Ryott 0 where a film actor, who was known by a certain pseudo-
nym while employed by the defendants, covenanted not to perform
under that name after his contract of employment ended. The Court
of Appeal found the covenant to be in restraint of trade because
the success or livelihood of the actor was dependent upon the use
of his pseudonym. In the Dalwood case Hope J. took a similar posi-
tion, and held that the prohibition against the use of the word
“Dalwood” was in restraint of trade. It is submitted that this is
correct, since a trade name may be part of a trader’s capital where
he has traded under it before and goodwill has become attached to it.
The extent of activities which are included within “trade” was
also considered in Queensland Co-operative Milling Association Ltd.
v. Pamag Pty. Ltd.17 In that case, the covenantor was a baker who
agreed to take all his requirements of flour from the covenantee.
12 (1971) 125 C.L.R. 353, 372.
13 Supra, f.n.8.
14 [1970] 1 N.S.W.R. 686.
15 (1886) 34 Ch. D. 748, 751.
A Supra, f.n.6.
17 (1973) 1 A.L.R. 47.
McGILL LAW JOURNAL
[Vol. 21
The restraint was thus limited to the supply of raw materials, and
did not affect the retail sales of products made from the flour to
customers. The Court held, however, that the covenantor’s trade in-
cluded not only retail sales to customers but also his purchases of
raw materials. The restraint of trade doctrine was thus applicable.
What is a Restraint?
The question of whether a particular limitation is a restraint has
arisen in several recent cases involving professional athletes. In
Buckley v. Tutty I the Court considered whether rules of the New
South Wales Rugby League which restricted the transfer of players
from one club to another were in restraint of trade. It was argued
that because the retain and transfer rules applied only to professional
players, who numbered less than 1,000, while the remaining League
rules applied to 500,000 players, “the small area of impact of the
challenged rules makes it impossible to regard them as a re-
straint…-.19 The New South Wales Full Court rejected this test, and
examined instead the relations between individual professionals and
their employers. Loss of freedom to choose employers was a re-
straint of a severe kind to the individual, even though a relatively
small number of individuals were involved.
It was also argued that there was no restraint because the League
was analogous to a single large firm preventing its employees from
freely changing their departments. Both the Full Court and the
High Court accepted that in such circumstances there might not be
a restraint, but denied that the analogy existed in that case. The
various clubs which employed the Rugby League players were
separate entities and therefore different employers, even though they
had subordinated themselves to a central organizing association for
certain purposes. The High Court also rejected the argument that
instead of restraining trade, the rules fostered and encouraged it
by giving opportunities to players to make money out of their skill:
“The rules however prevent professional players from making the
most of the fact that there are clubs prepared to bid for their ser-
vices” .
An agreement in restraint of trade must be distinguished from
one which is in substance a profit-sharing agreement. In Stenhouse
Australia Ltd. v. Phillips21 the parties had agreed that if any client
18Supra, f.n.7.
19 Ibid., 471.
20 Supra, f.n.12.
21 [1974] 2 W.L.R. 134.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
329
of the covenantee should, within five years of the ending of the
covenantor’s employment, place insurance business so as to give
the covenantor any financial benefit, the covenantor should pay the
covenantee one-half the gross commission received. It was argued
that this was not in restraint of trade but was rather a profit sharing
agreement. The Privy Council held that the question should be
“determined not by the form the stipulation wears, but … by
its effect in practice”.22 This was not profit sharing, but rather gross
revenue sharing, and it operated as a disincentive to trade.
The Frontiers of the Doctrine
Does the restraint of trade doctrine apply to all restraints? In
Esso Petroleum Co., Ltd. v. Harpers Garage (Stourport) Ltd.2
3 the
House of Lords rejected certain limitations which had previously
been placed on the doctrine.
Before that case, though occasional statements suggested that
the doctrine applied to all restraints of trade, in practice the only
covenants normally subjected to the test of reasonableness were
those imposed by employers to prevent employees competing after
they left their employment and those imposed by the buyer of a
business to protect its goodwill from the competition of the seller.
Most of the remaining cases were horizontal price fixing or produc-
tion sharing agreements.
The Esso case concerned two solus agreements by which the
respondents agreed to take from the appellants all its petrol re-
quirements for one garage for twenty-one years, and all its petrol
requirements for another for four and one-half years. In deciding
that the first covenant was unreasonable and the second reasonable,
the House of Lords held that the doctrine applied to mortgages and
was not limited to the traditional categories. Their Lordships held
that the doctrine extended to restraints imposed during the con-
tinuance of an obligation as well as to those taking effect only after
its termination. The House of Lords also rejected an argument that
the doctrine only applied to restraints on persons, not to restraints
on a particular piece of land from which a trader could move to
carry on his trade elsewhere.
Subsequent decisions have in large part adopted the expanded
application of the restraint of trade doctrine as set out in the Esso
case. Thus, the doctrine has been repeatedly applied to restraints on
22Ibid., 140 per Lord Wilberforce.
23 Supra, f.n.5.
McGILL LAW JOURNAL
(Vol. 21
the use of land as well as restraints on individuals, 24 to restraints
imposed during the continuance of some obligation as well as those
imposed after its termination, 25 and to restraints contained in a
mortgage document. 26
In the Esso case, the House of Lords majority placed one ques-
tionable limitation on the doctrine, i.e., in the case of covenants
involving the use of land. It was held that the doctrine applies only
where the covenantor has cut down some prior right to trade on a
particular piece of land, and not where he has acquired by the
covenant some right to trade, however limited, which he did not
previously enjoy.2 7 This limitation was not in fact applied in the
Esso case,28 but it was applied by the English Court of Appeal in
Cleveland Petroleum Co., Ltd. v. Dartstone.29 In that case, an in-
terlocutory injunction was granted to restrain breach of a solus
agreement by a petrol company which had no right to sell petrol on
the particular site before entering the agreement. Despite this de-
cision, this limitation has not been widely accepted; statements by
the High Court of Australia in Buckley v. Tutty30 and the English
Court of Appeal in Instone v. A. Schroeder Music Publishing Co.,
Ltd.31 indicate disagreement with it. There are clearly arguments
of principle against the Esso-Cleveland view,32 notably that the test
24 McGuigan Investments Pty. Ltd. v. Dalwood Vineyards Pty. Ltd., supra,
f.n.14; Amoco Australia Pty. Ltd. v. Rocca Bros. Motor Engineering Co. Pty. Ltd.
(1973) 1 A.L.R. 385; Hogarth J. in the South Australian Full Court was inclined
to accept the view rejected by the majority in Amoco (unreported).
25 Instone v. A. Schroeder Music Publishing Co. Ltd. [1974] 1 All E.R. 171;
the House of Lords dismissed an appeal: [1974] 1 W.L.R. 1308.
26 MacIntyre v. Cleveland Petroleum Co. Ltd. 1967 S.L.T. 95; Queensland
Co-operative Milling Association Ltd. v. Pamag Pty. Ltd., supra, f.n.17.
2TEsso, supra, f.n.5, 298 per Lord Reid. Lords Morris, Hodson and Pearce
agreed (306-9, 316-7, and 325); Lord Pearce also said the doctrine should not
apply where trade was promoted rather than restrained so that the covenan-
tor’s capacity was absorbed and not sterilized (328). (This was rejected by
the Court of Appeal in Instone’s case, supra, f.n.25.)
Lord Wilberforce said the doctrine should not be applied to “accepted
and normal” restraints (331-3). This has occasionally been cited with approval
by later courts, e.g., Lord Reid in Instone’s case, supra, fn.25, 1314.
28See Heydon, The Restraint of Trade Doctrine (1971), 58-59.
29 [1969] 1 All E.R. 201; and see Robinson v. Golden Chips (Wholesale) Ltd.
[1971] N.Z.L.R. 257.
3
0 Supra, f.n.12.
3l Supra, f.n.25, 177. See also Pharmaceutical Society of Great Britain v.
Dickson [1970] A.C. 403, 431 per Lord Hodson, and 440 per Lord Wilberforce;
and Queensland Co-operative Milling Association Ltd. v. Pamag Pty. Ltd., supra,
f.n.17, 65 per Stephen J.
82 See Heydon, supra, f.n.28, 56-59.
1975J
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
331
leads to anomalies and is easy to evade. For example, in the Cleveland
case the covenantor granted a lease to the covenantee, who then
granted a sublease to a company controlled by the covenantor.
Because the agreement in Cleveland was made before the Esso
decision, there was no element of fraude & la loi. While Salmon L.J.
might have taken a different view if there had been, it is perhaps
questionable whether the courts should become involved with such
issues. The Cleveland case is an extreme example of a refusal to
pierce the corporate veil, which is not appropriate for the restraint
of trade doctrine, depending as it does on issues of public policy.3
The majority Esso test was also considered in McGuigan In-
vestments Pty. Ltd. v. Dalwood Vineyards Pty. Ltd.34 Hope J. appeared
to favour a wide application of the doctrine, and held that the
limitation set out in the Esso case was only intended to apply:
… in … cases where the covenantee has some interest in land to protect,
as where a lessor imposes the covenants on the lessee in a lease of the
land or where a vendor imposes the covenants for the benefit of land
which he retains after the conveyance of the burdened land to the
covenantor.3 5
This view may very well be sound; whatever the merits of the
Esso principle, and despite the width of some of the language used
to state it, it does not seem to have been intended to apply to
covenants over land in gross (that is, which do not benefit other
land), or covenants not affecting the use of land at all. It explains
why the House of Lords did not apply their own test to the facts of
Esso, because the covenant there was in gross; in Cleveland, on the
other hand, the covenant was imposed in granting a sublease by the
lessee, who retained an interest in land to protect. In Dalwood,
though the covenantee retained land seventeen miles away, it could
not have been benefited by the covenant. If Hope J. is correct, the
Esso limitation is left only a narrow area of operation; but in the
writer’s view, the factors it takes into consideration are more
properly relevant to issues of reasonableness than of the initial
application of the doctrine.
In Esso36 Lord Pearce expressed the view that the restraint of
trade doctrine does not apply where the dominant character of the
contract is for the promotion of trade rather than its sterilization.
33 See the Amoco case, supra, f.n.24, 388 per Menzies I.; see also judgments
of Wells 1. and Bray CJ. (unreported).
34 Supra, f.n.14.
35 Ibid., 692-693.
36Supra, f.n.5, 329 329; followed in S.A. Wire Co. (Pty.) Ltd. 1968 (2) S.A.
777 (a tender fixing agreement); Rhodesian Milling Co. (Pvt.) Ltd. v. Super
Bakery (Pvt.) Ltd. 19 3(4)S.A. 436.
McGILL LAW JOURNAL
[Vol. 21
This argument was treated coolly in Buckley v. Tutty;37 further, in
Instone v. A. Schroeder Music Publishing Co., Ltd.;” the English
Court of Appeal disagreed with this approach on the grounds that
classification of covenants in this way would pre-empt the decision
on reasonableness.
All aspects of the Esso decision were extensively considered in
Amoco Australia Pty. Ltd. v. Rocca Bros. Motor Engineering Co. Pty.
Ltd.3 9 In that case, Rocca granted a lease of land to Amoco, who in
turn granted a sublease back to Rocca. The agreement provided
that the land was to be used only as a service station and that Rocca
would buy all of its petrol supplies from Amoco. At the time of the
agreement in 1964, Rocca was entitled to be registered as owner of
the land and shortly thereafter became owner. A petrol station
was built on the land, and in 1966 the lease and sublease were
executed, with the latter containing inter alia the above restrictive
clauses. Wells J. in the South Australian Supreme Court held that
the restraint of trade doctrine applied (although he had some
doubts on the issue), while the Full Court and the High Court of
Australia (Stephen J. dissenting) were in no doubt that it did.
The principal argument against the application of the doctrine
was that in the interval of time between lease and sublease, Rocca
lost any right to trade on the land, and therefore entering the
sublease subject to a tie did not cut down any existing freedom
within the majority Esso test. This argument was rejected because
the transaction had to be looked at as a whole. Rocca had only
lost possession for a scintilla of time; while lease and sublease were
not shams, they were simply methods of giving effect to one overall
transaction and were not the true source of Rocca’s right to trade,
which derived instead from its ownership of the land when the
negotiations began.40 Bray C.J. in the Full Court also said that the
transaction could not fall within the exception to the restraint of
trade doctrine set out in the Esso case because it imposed onerous
positive obligations to keep the petrol station open at certain times41
S7 Supra, f.n.12, 372-373.
38 Supra, f.n.25, 177.
39 Supra, f.n.24. The decisions of Wells J. and the South Australian Full Court
are as yet unreported.
40 Ibid., esp. 397-398 per Walsh J.
41 See the Esso case, supra, frn.5, 298 per Lord Reid, and 327 per Lord Pearce.
Cf. Robinson v. Golden Chips (Wholesale) Ltd., supra, f.n.29, 267, where the
presence of positive obligations was ignored and the Esso test applied.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
333
and not just negative restrictions. The test of the majority in Esso
was criticized extensively although for different reasons 4 2
In Amoco Wells J. considered two further arguments for not
applying the restraint of trade doctrine. One was that no enquiry
as to reasonableness should be undertaken where the covenantor
was entering a new business and had no way of doing this except
by accepting some trade tie43 The other was that the doctrine did
not apply where the parties agreed to embark on a joint venture in
setting up a business. The Full Court and the High Court44 rejected
both arguments. The arguments may not even have been applicable
to the facts of the case, for Rocca could have dealt with other oil
companies and might have obtained better terms from them.
Moroever, as Gibbs J. said, “perhaps it is in such cases that the
doctrine is most likely to be needed to prevent the imposition of
restraints which would be injurious. ..,45
Stephen J. dissented on the grounds that the covenant did not
impose any restriction on the covenantee’s pre-existing freedom to
trade, nor did it impose a restraint operating after the commercial
relationship between the parties had ended. Furthermore, he stated
that the commercial realities of the situation meant that the covenant
in question was actually productive of trade, since the only practical
choice which Rocca had was to accept a tie with some oil company
or not enter the business at all. For this reason, he believed that
any evils resulting from the “tie system”, whereby service stations
could come into existence only if they were “tied” to some oil com-
pany for the supply of petrol, must be remedied by Parliament rather
than by the common law.
In one respect, these views are particularly anomalous. If a
covenant falls outside the doctrine because the covenantor can only
42 Hogarth l. would have preferred a narrower view. Bray CJ. would have
preferred Lord Wilberforce’s wider view, which depended on “the practical
working of the restraint, irrespective of its legal form” (Pharmiaceutical
Society of Great Britain v. Dickson, supra, f.n.31, 440; see also Lord Hodson
at 431). Menzies J. (at 388) and Walsh J. (at 397) doubted the limitation on
the doctrine set out in the Esso case. Gibbs J. preferred to state no view on
the limitation (at 405); while Stephen J. approved it (at 413-418). In Queens-
land Co-operative Milling Association Ltd. v. Pamag Pty. Ltd., supra, f.n.17,
65-66, Stephen J. suggested the limitation may be extended from cases where
the covenantor had no pre-existing freedom to trade because of lack of land to
cases where he lacked freedom to trade because of lack of money.
43This was inconsistent with the High Court of Australia decision in
Queensland Co-operative Milling Association Ltd. v. Pamag Pty. Ltd., ibid.
44 Amoco, supra, 288 per Menzies J., 398 per Walsh J., 406 per Gibbs J.
45 Ibid., 406.
McGILL LAW JOURNAL
[Vol. 21
trade if he accepts a tie, why should it fall within the doctrine if
the restraint continues after the other provisions of the contract have
ended? In both cases the restraints may be necessary if the man is
to trade.46 It is submitted that Stephen J.’s views sanction a judicial
passivity which is contrary to the nature and history of the doctrine,
and as such are inconsistent with the Esso majority. They also ignore
Walsh J.’s point that although the facts relating to the practical
impossibility of entry into petrol retailing without accepting a tie
may have to be taken into account on the issue of reasonableness,
“they should not be held to prevent the Court from considering
that question at all” 7
Recent decisions have made it plain that the doctrine extends
beyond ordinary contracts in at least three respects. First, rules
passed by associations which restrict the trade of their members are
subject to the doctrine, according to the House of Lords decision in
Pharmaceutical Society of Great Britain v. Dickson.48 (Even if the
case is regarded as contractual in that each member on joining
the society impliedly agreed to the possibility of changes in the
rules imposing restrictions, it still represents an extension of the
doctrine’s traditional scope.) Secondly, the doctrine applies to rules
passed by a group of associations which affect persons who do not
belong to the rulemaking body (for example, where a professional
Rugby League consisting of a number of clubs enacts rules which
restrict transfer of players between clubs). 49 Thirdly, monopolistic
controls over entry to and expulsion from trades are subject to the
doctrine, whether the controls are exercised by bodies which govern
the trade5 or by trade unions.”
An important but infrequently considered issue regarding the
frontiers of the doctrine was raised in Blackler v. New Zealand Rugby
Football League (Inc.).5 2 In that case, one rule of the defendant body
prohibited Rugby League players from playing outside New Zealand.
The New Zealand Court of Appeal held by a majority that the
restraint of trade doctrine applied, even though the restraint only
46This oddity was also accepted by the New Zealand Court of Appeal in
Robinson v. Golden Chips (Wholesale) Ltd., supra, f.n.29.
47Amoco, supra, f.n.24, 398.
48 [1970] A.C. 403. See also Eastham v. Newcastle United Football Club, Ltd.,
supra, f.n.8.
49 Eastham v. Newcastle United Football Club, Ltd., ibid.; Blackler v.
New Zealand Rugby Football League (Inc.), supra, f.n.8; Buckley v. Tutty,
supra, f.n.12; cf. Elford v. Buckley, supra, f.n.7.
50Nagle v. Feilden [1966] 2 Q.B. 633.
51 Edwards v. S.O.G.A.T. [1971] Ch. 354, 377, 382-383.
52 Supra, f.n.8.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
335
operated outside the jurisdiction; in other words, “restraint” in-
cluded all restraints, not merely those operating within New Zealand.
To hold otherwise would be undesirable from the point of view of
New Zealand public policy, “for in this young country it is necessary
that its citizens should have the opportunity of gaining wider ex-
perience in their chosen field in the larger overseas countries”. 3
Legitimate Interests
In post-employment covenants restraining the ex-employee, and
covenants taken from the seller of a business to protect its goodwill
in the purchaser’s hands, the legimitate interests recognized as
capable of protection are customer connection, trade secrets and
the Privy
know-how.
Council suggested that a covenant made after the termination of
employment may in some circumstances be unenforceable for want
of any legitimate interest to protect. This seems to overlook the
fact that the interests capable of protection remain the same when-
ever the covenant is taken.
In Stenhouse Australia Ltd. v. Phillipse5
Sufficient Customer Connection
Sufficient customer connection to justify restraint has been found
to exist in cases involving milk roundsmen,0 hairdressers 7 sales
representatives, 8 sales managers, 59 insurance agents,0 the employee
of a household removals firm,61 and an estate agent’s clerk substan-
tially in charge of dealings with customers at one of his employer’s
offices,”2 provided the customers are recurring ones.P In one case,
however, a restraint covering a saleman’s customers before he
53Ibid., 555 per North P.
54 Printers and Finishers, Ltd. v. Holloway [1964] 3 All E.R. 731; Commercial
Plastics, Ltd. v. Vincent [1965] 1 Q.B. 623.
36.
55 Supra, f.n.21, 141-142 per Lord Wilberforce.
56 Home Counties Dairies, Ltd. v. Skilton [1970] 1 All E.R. 1227.
57 Cope v. Harasimo (1964) 48 D.L.R. (2d) 744 (B.C.C.A.); Nachtsheim v.
Overath 1968 (2) S.A. 270; Marion White Ltd. v. Francis [1972] 3 All E.R. 857.
58National Chemsearch Corporation Caribbean v. Davidson (1966) 10 W.I.R.
59 Leontaritis v. Nigerian Textile Mills Ltd. 1967 (3) A.L.R. Comm. 131.
60 Orville Kerr Ltd. v. De Witt (1969) 8 D.L.R. (3d) 436; Stenhouse Australia
Ltd. v. Phillips, supra, f.n.21.
01 Steevens v. Allied Freightways Ltd. [1968] N.Z.L.R. 1195.
,02 Scorer v. Seymour-Johns [1966] 3 All E.R. 347; H.E. Sergay Estate Agencies
(Pvt.) Ltd. v. Romano 1967 (3) S.A. 1.
63 Phillip M. Levy Pty. Ltd. v. Christopoulos [1973] V.R. 673.
McGILL LAW JOURNAL
[Vol. 21
worked for the employer was held to be too wide.” Sufficient
customer connection was an issue in Aloha Shangri-la Atlas Cruises
Pty. Ltd. v. Gaven0 5 where the Court considered whether the personal
goodwill acquired by a ship captain such that individual customers
would seek out his captaincy was capable of protection. The Court
held that the preference of tourists for a particular captain created
a property in him personally rather than in his employer, and as
such was not capable of protection on behalf of the employer.
A further example of what is not an interest capable of protection
arose in Lido-Savoy Pty. Ltd. v. Paredes. a Lush J. held that where
the defendant agreed to perform as an exotic dancer in the plaintiff’s
night clubs for twelve weeks, a covenant by the defendant not to
perform in Australia for the next eighteen months without the
plaintiff’s approval was void. The enhancement of the defendant’s
reputation by a publicity campaign run by the plaintiff was some-
thing which had become part of the defendant. Any customers
drawn away by the defendant would not be drawn as the resuit
of an abuse of any connection which the plaintiff could regard as
its property, but simply as a result of the use of the defendant’s
qualities as an exotic dancer.
Trade Secrets
The courts have generally applied strict standards in considering
the existence of trade secrets ” as interests capable of protection. In
Aloha Shangri-la Atlas Cruises67 the Court also concerned itself with
this question.
The plaintiff company was engaged in the business of running
marine tourist trips. Its directors, who were also directors of other
companies which held shares in the plaintiff company, agreed that
neither they nor their companies would compete with the plaintiff
company so long as its shares were held by the same shareholders.
The plaintiff company argued that the defendant director’s know-
4Northern Messenger & Transfer Ltd. v. Fabbro (1964) 45 D.L.R. (2d) 73.
6
65 [1970] Qd. R. 438.
65a [1972] V.R. 297; followed in Phillip M. Levy Pty. Ltd. v. Christopoulos
[1973] V.R. 673, where it was held that the employee’s skill and ability could
not be restrained, and his ability to sell real estate was bound up with his
reputation promoted by the employer.
66 Northern Messenger & Transfer Ltd. v. Fabbro, supra, f.n.64; Colonial
Broadcasting System Ltd. v. Russell (1964) 48 D.L.R. (2d) 242; American
Building Maintenance Co. Ltd. v. Shandley (1966) 58 D.L.R. (2d) 525; Acker-
mann-Gdggingen Aktiengesellschaft v. Marshing 1973 (4) S.A.S.R. 62.
O7 Supra, f.n.65.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
337
ledge of the local tourist trade and of the plaintiff company’s
methods of obtaining customers through booking agents constituted
trade secrets. The Queensland Full Court found that there were no
interests capable of protection: the plaintiff company’s methods of
operating were matters of public knowledge because of widely
disseminated information as to how tourists could book ships and
what entertainment was available for them. This decision may be
compared with Management Recruiters of Toronto Ltd. v. Bagg68
where the employee of an employment agency broke his covenant not
to compete after leaving his employment, and took with him on
departure thirty-two job offers and one hundred and forty-eight
prospect files. Wells C.J. in the Ontario High Court held that the
mere fact the employee removed the documents suggested there
was confidential information capable of being protected by the
covenant.
Sometimes a court of equity may prevent the use of information
even though it is not sufficiently “confidential” to support a covenant
in restraint of trade. A neat example is the contrast between the
decisions of the Ontario Court of Appeal and the Supreme Court of
Canada in Canadian Aero Service Ltd. v. O’Malley. 9 The two de-
fendants, while employed by the plaintiff company, unsuccessfully
tried to obtain for it a contract to map a certain area. Some time
later they left the plaintiff company and obtained the contract for
themselves. The Ontario Court of Appeal held that no remedy could
lie against them with or without a covenant. No interest capable
of supporting a restrictive covenant existed because the contract
was obtained by the use of the defendants’ personal education and
skill and information gained by them from the Canadian Govern-
ment, rather than through the use of any secret information belong-
ing to the employer. As Choor Singh J. said in V.S.L. Prestressing
(Australia) Pty. Ltd. v. Mulholland 9a when refusing an injunction
against the breach of a covenant restaining a civil engineer whose
employers had spent large sums on his training:
Some of these matters are undoubtedly confidential in the sense that the
plaintiffs would not like any of their competitors to have knowledge of
them but in the other sense they do not in my opinion constitute a trade
secret.
The Supreme Court of Canada, however, in a judgment delivered
by Laskin J., found for the company. While it accepted that there
were no trade secrets, it held that the defendants, as president and
68 (1970) 15 D.L.R. (3d) 684.
69 (1971) 23 D.L.R. (3d) 632; (1973) 40 D.L.R. (3d) 371.
89a [1971] 2 M.LJ. 89.
McGILL LAW JOURNAL
[Vol. 21
executive vice-president of the company, were not mere employees,
but owed fiduciary duties to the company. Their use of the informa-
tion infringed the strict equitable rule forbidding a fiduciary to allow
his interest to conflict with his duty to his principal.
Goodwill and Other Legitimate Interests
Two other possible innovations concerning interests capable of
protection have recently been discussed. In McGuigan Investments
Pty. Ltd. v. Dalwood Vineyards Pty. Ltd .7
the plaintiff company had
two subsidiaries. The first subsidiary sold a vineyard called Dalwood,
and the purchaser agreed not to use the land for any business
which would include the word “Dalwood” in its name. The second
subsidiary had a right to buy all the grapes from another vineyard
seventeen miles away, and had habitually used the name “Dalwood”
in connection with wine. It was clear that had the second subsidiary
been the covenantee, it would have had a sufficient interest to impose
the covenant in restraint of trade; in effect, it would have sold the
land on which the Dalwood business was carried on but would have
retained the goodwill of the business. However, because the actual
covenantee (the first subsidiary) had no interest in the name
“Dalwood” and had never carried on any business in which the name
was used, on orthodox lines it could not justify restraining the
covenantor from using it.
It was argued, however, that by protecting the interests of the
second subsidiary in the name Dalwood, the covenant was really
protecting the interests of the group of associated companies as a
whole. The argument had been rejected with regard to employee
covenants by the English Court of Appeal in Henry Leetham & Sons
Ltd. v. Johnstone-White.71 The argument would also seem to be in-
consistent with the rationale of the goodwill cases, for the point of
permitting restrictive covenants in such cases is to preserve the value
of what is sold: the covenant is imposed on the seller of the property,
not on the buyer, as it was in the Dalwood case. Hope I. never-
theless found “much substance” 7 in the argument that a covenant
protecting any interests of the group as a whole could be validated.
In the present case he preferred not to uphold it because it was not
supported by authority. Moreover, there was insufficient evidence
that the name “Dalwood” was associated with the group generally
or with any company in it other than the second subsidiary.
70 Supra, f.n.14.
71 [1907] 1 Ch. 322.
72 Supra, f.n.14, 695.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
339
Dalwood may be compared with Stenhouse Australia Ltd. v.
Phillips.73 There, protection was given not to the covenantee com-
pany itself but rather to subsidiary companies which were separate
legal entities. The Henry Leetham74 case was distinguished:
That was a case where the agreement … was with one company of a
group, that one company having a limited business, whereas the restraint
was expressed in far wider terms, extending to the area covered by the
operations of the group as a whole ….
[But here the] subsidiary com-
panies were merely agencies or instrumentalities through which the
appellant company directed its integrated business. Not only did the
appellant company have a real interest in protecting the businesses of
the subsidiaries, but the real interest of so doing was that of the appellant
company. It is not necessary to resort to a conception of “group enter-
prise” to support these proceedings.1 5
A second extension to what interests are recognized as legitimate
occurred in the football cases. In the Blackler case the New Zealand
Court of Appeal recognized that some control could be justified “as
necessary to protect the sport [rugby] in New Zealand and in
particular to ensure that those on whom money has been spent in
training or in overseas tours return to the sport a fair measure for
what has been done for them”. In Buckley v. Tutty
the Full Court
held that the clubs and the league had a legitimate interest in
regulating the strengths of the various teams. The High Court agreed:
stability of team membership would increase players’ skills, team
spirit and public support.”8
Thus, a wide basis may exist for validating restraints outside the
traditional interests capable of protection by post-employment co-
venants and covenants by sellers of businesses. It becomes acutely
necessary to consider this new wider basis –
the overall welfare
of groups of firms or industries –
as the net of the doctrine gra-
dually extends. Otherwise, the doctrine will come to depend not on
reasonableness but rather on per se rules.
The difficult question of determining what legitimate interests
exist outside the employee and goodwill cases has now been ex-
tensively considered. In Mobil Oil Australia Ltd. v. McKenzie Adam J.
said that,
… the interests must be in the nature of proprietary rights, and …
a commercial interest, as distinct from one involving some right of
73 Supra, f.n.l, 142.
74 Supra, f.n.71.
75 Supra, f.n.21, 142.
76 Supra, f.n.8, 572 per McCarthy J.
77 Supra, f.n.9.
78 Supra, f.n.12.
McGILL LAW JOURNAL
[Vol. 21
property, would not, unless the legal principles already applied should be
extended, be sufficient.1 9
In that case, the defendants had been appointed the plaintiff
company’s sales representatives in a certain area under an agreement
by which the defendants became owners of the products to be
marketed and by which they were prevented from selling other
petroleum products within the agency area. Adam J. held that the
business of marketing was essentially that of the defendants, for
the assistance given to them by the plaintiff company through its
provision of depots and items of plant was relatively slight. Hence
any goodwill built up in the course of selling the products to the
public should be considered the exclusive property of the defendants.
For this reason, the interest of the plaintiff company in the success
of the defendant’s business was merely commercial and not pro-
prietary. Pyle v. Sharp Bros. Pty. Ltd.80 was distinguished; in that
case, the principal did much more to find customers for the sales
representative; there was a short period of training in canvassing
and marketing; and the representative was obliged to inform the
principal of his activities and success in selling the product by
handing over a record of names and addresses of customers and
particulars of purchases they had made.
Such reasoning as that of Adam J. in the Mobil Oil case is
necessary only if the proprietary-commercial distinction is relied on.
Several recent cases indicate, however, that the distinction
is
vanishing. The football cases show that the health of an industry as
a whole may be a relevant factor to consider. Several solus agree-
ment cases also indicate that interests other than those of a pro-
prietary nature may be capable of protection. In Amoco Australia
Pty. Ltd. v. Rocca Bros. Motor Engineering Co., Ltd. Wells J. said
that a petrol company had legitimate interests to protect by a solus
covenant taken from a petrol station proprietor.8′ Such arrangements
were necessary to enable the company to carry on its business of
selling as much petrol as possible, particularly if the company were
a new one trying to enter the trade, such as Amoco was. In the Full
Court, Bray C.J. said that “legitimate” in the phrase “legitimate
interests”,
… must be intended to connote some notion of fair and reasonable
profit or fair and reasonable trading. In one sense, it may be in the
79 [1972] V.R. 315, 318.
80 [1968] 2 N.S.W.R. 511.
81 (1972), unreported, following Petrofina (Great Britain) Ltd. v. Martin
[1966] Ch. 146, 173-174 per Lord Denning M.R., and 188-189 per Lord Diplock;
see also Esso, supra, f.n.5.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
341
interests of any trader to get as much profit or advantage as he can for
as little detriment as possible, but if that were to be protected ad
infinitum the whole doctrine of restraint would be swept away….
[The
covenant must only provide] adequate protection for his proprietary and
commercial interests involved, so as to give him both reasonable security
for his investment, when that is in question, and adequate assurance of
reasonably profitable trading when that is in question.8 2
Thus, Amoco could protect both its investment of $7,775 in the land
(in providing and installing equipment) and its interest in selling as
much of its products as possible with a view to making a reasonable
profit. But sums spent in addition to those agreed upon at the time
of contracting in June 1964 were not legitimate interests. The
majority of the High Court expressed agreement with the views of
Wells J. and Bray C.J. 3
In Queensland Co-operative Milling Association Ltd. v. Pamag
Pty. Ltd. the Court considered the validity of an agreement by a
baker to take all his flour requirements from the covenantee.
Menzies J. held that although the law frowned upon attempts by
covenantees to protect themselves from “competition per se”, at-
tempts to avoid some competition were permissible if the covenantor
were given sufficient advantages&4 Walsh J. said that the covenantee’s
commercial interest in selling as large a quantity of its goods as
possible was a legitimate interest. 85 Stephen J., on the other hand, did
not find it useful to ask whether “competition” was restrained since
on the facts there was no restraint on competition between the
parties. The covenantee’s desire to increase sales and to retain the
covenantor as his customer were legitimate interests which could
be protected.
It would seem, then, that for cases of this kind, the careful
measuring of restraints against “interests” typical of employee and
goodwill cases is not applicable now that such a wide definition is
given to “interests”. Questions which must be considered instead
include whether the restraint is normal, whether there is excessive
hardship on the covenantor or excessive benefits to the covenantee,
and whether the public interest will be harmed. However, Stephen J.86
appears to overstate the case in Pamag in asserting that no interest
other than increasing sales was involved; surely a long term sole
requirements contract enabled the miller in that case to predict his
future activities, e.g., to decide whether new capital investment
n Ibid.
83 Supra, f.n.24, 397, 401 per Walsh J., and 410 per Gibbs J.
84 Supra, f.n.17.
85 Ibid., 53.
86Ibid., 60-61.
McGILL LAW JOURNAL
(Vol. 21
should be made and equipment installed. For new entrants as well
as existing competitors these are vital matters; there is a public
interest in rationally-based competition. The reasoning to be used
is surely very similar to that employed in the petrol cases, though
the interest to be protected there may be stronger.
Reasonableness
General Questions of Reasonableness
The Courts have devoted much attention to general questions
governing reasonableness. First, an agreement will be interpreted
to exclude extravagant possibilities. In Home Counties Dairies, Ltd.
v. Skilton 7 a milk roundsman agreed not to sell dairy products after
his employment ended. Pennycuick J. held that since “dairy products”
included articles sold by grocers, the clause was too wide in that
it prevented the employee from working for a grocer. The Court of
Appeal reversed this decision because the position of the party
suggested that the contract only related to the employee’s trade as
a milk roundsman. The risk of breach arising if both employee and
customer moved to another part of the country was ignored, for
even if this were a breach, it would sound only in nominal damages
and not be enjoined. Salmon L.J. stated:
If a clause is valid in all ordinary circumstances which can have been
contemplated by the parties, it is equally valid notwithstanding that it
might cover circumstances which are so “extravagant”, “fantastical”,
“unlikely or improbable”, that they must have been entirely outside the
contemplation of the parties.88
A similar result has been achieved in Canada by holding that public
policy favours competition and alienability of property, so that agree-
ments with contrary tendencies should be strictly construed. Hence,
the “business of a hairdresser and beauty salon” does not extend
to the sale and servicing of wigs.8 9
One factor which may be considered in determining the reason-
ableness of a covenant is the relative bargaining positions of the
parties. The covenantor is not always weak: he may be a formidable
negotiator; 90 there may be a shortage of skilled labour; the cove-
nantor may be protected by the bargaining power of a strong unionY1
87 [1970] 1 All E.R. 1227.
88 Ibid., 1233 per Salmon L..; Marion White Ltd. v. Francis [1972] 3 All E.R.
857. See also Pyle v. Sharp Bros., supra, f.n.80.
89 Russo v. Field and Menat Construction Ltd. (1970) 12 D.L.R. (3d) 66S.
90 Amoco, supra, f.n.24.
91 Ackermann-Gdggingen Aktiengesellschaft v. Marshing, supra, f.n.66.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
343
Of course, a restraint may be set aside even though the parties have
equal bargaining power 92
In determining reasonableness, different views have been ex-
pressed about the relevance of the fact that there is only a very
brief period of employment or that employment is terminable on
very short notice.93 Some courts consider that the only relevance of
such facts is to limit the extent to which the employer has any in-
terests capable of protection by the covenant.
In determining questions of reasonableness, the High Court of
Australia stated in the Amoco caseP that the court will not readily
substitute its own views for those of the parties.95 However, it
rejected the statement of Ungoed-Thomas J. in Texaco Ltd. v. Mul-
berry Filling Station Ltd.9 6 that it was “right in principle and
in accordance with the habitual inclination of the court not to
interfere with business decisions made by businessmen authorized
and qualified to make them”.
In considering the reasonableness of any covenant, it is neces-
sary to examine the question in two parts: first, as between the
parties aild second, according to the public interest. The Esso
case 97 indicates that in the future there will likely be greater emphasis
on the public interest than there has been in the past. In Amoco,
Walsh J. stated that although the two limbs are distinguishable,
they overlap, because something unreasonable as between the parties
which deprives “a person of his liberty of action is regarded as
detrimental to the public interest”. 98 It is unlikely that the two limbs
could be completely merged because the burden of proving reason-
ableness as between the parties rests on the covenantee, while the
burden of proving unreasonableness in the public interest is on the
covenantor.99
92 Amoco, supra, f.n.24, 401 per Walsh J., 408-409 per Gibbs I.; Pamag, supra,
f.n.17, 53 per Walsh I., and 59 per Stephen I.; cf. Texaco Ltd. v. Mulberry Filling
Station Ltd. [1972] 1 W.L.R. 814.
93 Cf. Northern Messenger & Transfer Ltd. v. Fabbro, supra, f.n.64, and
Gledlow Autoparts Ltd. v. Delaney [1965] 1 W.L.R. 1366, 1377; National
Chemsearch Corporation Caribbean v. Davidson, supra, f.n.58, 43; Pyle v.
Sharp Bros., supra, f.n.80; Home Counties Dairies, Ltd. v. Skilton, supra,
f.n.56.
94 Supra, f.nI24, 400 per Walsh J., and 409 per Gibbs J.
95 See, e.g., Lyne-Pirkis v. Jones [1969] 1 W.L.R. 1293, 1301-1302.
96 Supra, f.n.92, 826.
97 Supra, f.n.5.
98 Supra, f.n.24, 400.
99 Queensland Co-operative Milling Association Ltd. v. Pamag Pty. Ltd., supra,
f.n.17, 59 per Stephen J.
McGILL LAW JOURNAL
[Vol. 21
Finally, the dispute continues as to the extent to which a decision
on the issue of reasonableness should take into account events sub-
sequent to the date of contracting. In the Amoco case’0 Wells J. took
into account the generally reasonable way the covenantee behaved,
thus contradicting his own reliance on the orthodox rule that the
relevant moment is that of contracting. Hogarth J. also stated the
orthodox rule but ignored it; he also said that a more liberal rule
might be desirable because of the risk that witnesses who could
have testified as to the reasonable nature of the agreement when it
was entered into might not be available at the time of the trial. In
the High Court, Gibbs J. said that while reasonableness was to be
judged at the date of contracting, subsequent events “might throw
light on the circumstances existing at the relevant date…,.o
Menzies J. took into account the fact that before the litigation began,
the covenantor had in fact agreed to a five year extension of the
lease of the service station subject to the tie. 2
A similar difference of opinion occurred in the English Court of
Appeal in Lyne-Pirkis v. Jones10 3 in considering an agreement not to
practice medicine within a ten mile radius. Edmund Davies-I and
Fenton Atkinson L.JJ. 0 5 would have upheld this as allowing for
some future expansion of the covenantee’s medical practice; however,
Russell L.J. 16 thought it invalid because in fact no patients existed
in the outer five miles by the time of the trial.
Subsequent events were taken into account by Wootton J. in
Green v. Stanton,10 7 but the British Columbia Court of Appeal’08
stated that there was “ample authority” that reasonableness should
be determined at the time of the covenant. The Court also rejected
the argument that reasonableness in the public interest should be
judged as from the time of breach, even if reasonableness between
the parties were to be judged at the time of contracting. This seems
correct, since both questions are merely aspects of a general issue of
public policy. In spite of the general principle, subsequent events
must be considered at least to this extent: reasonableness will often
10o Amoco case, supra, f.n.24.
101 Ibid., 409-410.
102 Ibid., 389.
’03 Supra, f.n.95.
104 Ibid., 1301.
305 Ibid., 1302.
106 Ibid., 1299-1300.
107 (1969) 3 D.L.R. (3d) 358, 365.
108 (1969) 6 D.L.R. (3d) 680, 687.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
345
depend on how far the covenantor has learned any trade secrets or
built up any customer connection before the restriction comes into
effect.
The Employee and Goodwill Cases
In addition to the general questions discussed above, a number
of more specific issues have arisen in the employee and goodwill
cases. First, are the activities from which the covenantor is restrain-
ed too extensive? Some recent examples may be noted. A prohibition
on working “in any capacity” is too wide when the covenantor only
worked as sales manager; he could not be restrained from working
in jobs where he would not be in a position to influence sales.1 09
A restraint on engaging in practice as a “medical practitioner” is
too wide if the covenantor is only a general practitioner because
“medical practitioner” includes “consultant”. 110 Similarly, a pro-
hibition on an employee practising any branch of medicine or surgery
is too wide where he was employed as a specialist in obstetrics and
gynaecology.”‘ But a covenant not to carry on the business of
“manufacturing sash and doors, general woodwork” is not too wide
where the covenantor had been sole shareholder in a sash and door
manufacturing company.”‘
Another factor to consider in determining the reasonableness of
a covenant involving former employees is the extent of the area
over which the covenant extends. Although covenants against solic-
iting customers with whom the covenantor has formerly dealt will
normally be upheld, the courts in recent cases have tended to find
unreasonable covenants extending over a defined geographical area.
This is particularly so where all the customers are known by name
and address” 3 and the business is largely done on credit by tele-
phone, 14 or where there are many persons in the area with whom
the covenantor never dealt, 15 or both;””‘ or where the area includes
109 T.S. Taylor Machinery Co., Ltd. v. Biggar (1968) 2 D.L.R. (3d) 281.
1″0 Lyne-Pirkis v. Jones, supra, f.n.95, following Routh v. Jones [1947] 1 All
E.R. 758; cf. Macfarlane v. Kent [1965] 2 All E.R. 376; see also Peyton v.
Mindham [1971] 3 All E.R. 1215.
11 Sherk v. Horwitz [1972] 2 O.R. 451.
ii 2 Hecke v. La Compagnie de Gestion Maskoutaine Ltde [1972] S.C.R. 22;
and see Aloha Shangri-la Atlas Cruises Pty. Ltd. v. Gaven, supra, f.n.65.
“13 Macfarlane v. Kent [1965] 2 All E.R. 376.
114 S.W. Strange Ltd. v. Mann [1965] 1 All E.R. 1069.
11 Gledtow Autoparts, Ltd. v. Delaney, supra, f.n.93; National Chemsearch
Corporation Caribbean v. Davidson, supra, f.n.58; cf. Pyle v. Sharp, supra, f.n.80.
116 T. Lucas & Co. Ltd. v. Mitchell [1974] Ch. 129.
McGILL LAW JOURNAL
(Vol. 21
places in which the covenantor never worked.117 On the other hand,
an area covenant will be justifiable if a solicitation covenant makes
it difficult for the covenantee to discover from customers whether
the covenantor is destroying his trade connection.”” Area covenants
may be considered appropriate in country districts where there
are large unpopulated areas.119 The reasonable possibility of future
expansion may also be taken into account in determining the validity
of area covenants. 20
An issue closely related to the area over which a covenant extends
is the number of people the covenantor is restrained from dealing
with. Restraints on dealings with customers of a company are bad
if the company has many more customers than the employee came
into contact with.’ 2′ On the other hand, a customer solicitation
covenant is valid even though it extends to persons who were the
employer’s customers at one time during the employment but ceased
to be before it was terminated. Harman L.J. has said:
… if a man was a customer at the beginning of the employment I do not
see why hope should be abandoned of his becoming a customer again at
the end of it and why, therefore, people who have, for the time being at
any rate, ceased to be customers, have fallen outside the proprietary in-
terest.122
A third issue that has arisen in cases involving former employees
is the length of time the covenant may last. A restraint may be
considered unreasonably long because its termination depends on
the exercise of a discretionary power which may never be exercised.123
117 Postage Mobilhome Co., Ltd. v. Challenger Home Builders Ltd. (1972) 29
D.L.R. (3d) 191; Phillip M. Levy Pty. Ltd. v. Christopoulos, supra, f.n.63.
118 Scorer v. Seymour-Johns, supra, f.n.62; Nachtsheim v. Overath, supra,
f.n.57; Reliance Cordage Co. Ltd. v. Hetterley (1969) 5 D.L.R. (3d) 297. See
also Ryder v. Lightfoot and Burns (1965) 51 D.L.R. (2d) 83; Steevens v.
Allied Freightways Ltd., supra, f.n.61; T.S. Taylor Machinery Co., Ltd. v. Biggar,
supra, f.n.109; Cameron v. Canadian Factors Corporation Ltd. (1970) 18 D.LR.
(3d) 574; Leventis Motors Ltd. v. Koumolis 1970 (1) A.L.R. Comm. 267; Olds v.
Tollgate Holdings Ltd. 1970 (4) SA. 267; Re B.A.C.M. Ltd. and Kowall Holdings
Ltd. (1972) 28 D.L.R. (3d) 365; Clarke Ltd. v. Thermidaire Corp. Ltd. (1973)
33 D.L.R. (3d) 13.
119 Hawkesbury Bakery Pty. Ltd. v. Moses [1965] N.S.W.R. 1242; Papastravou
v. Gavan [1968] 2 N.S.W.R. 286.
2 0 McAllister v. Cardinal (1964) 47 D.L.R. (2d) 313, 319 per Stewart J.
1
121 Northern Messenger (Calgary) Ltd. v. Frost (1966) 57 D.L.R. (2d) 456,
462463 per Kirby .
122 G.W. Plowman & Son Ltd. v. Ash [1964] 2 All E.R. 10, 13; followed in
Home Counties Dairies Ltd. v. Skilton, supra, f.n.56, 1234 per Salmon L.J., and
1235 per Cross L.. See also National Chemsearch Corporation Caribbean v.
Davidson, supra, f.n.58.
I= Aloha Shangri-la Atlas Cruises Pty. Ltd. v. Gaven, supra, f.n.65.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
347
The Supreme Court of Canada, in a case on appeal from Quebec
(where the Civil Code is to a similar effect as the common law),
held that an agreement was unreasonable where it provided that the
comptroller of a factoring company who had dealt with the accounts
of clients would not solicit the company’s customers for five years
after his employment ended. A reasonable period would be one or
two years, for this would be long enough for the employer to put
someone else in the covenantor’s place to deal with clients’ accounts
and prospective clients. 2 4
Other Cases
Several recent cases indicate what factors should be considered
in determining the reasonableness of covenants other than those
involving former employees and the sale of businesses. In Buckley
v. Tutty 25 the Full Court found that the football retain and transfer
system was unreasonable on a number of grounds. First, the player
was denied the economic value of his football capacity. Further, the
fact that players had a right to contract out suggested both that
the legitimate interests of the defendants were less pressing than
they alleged and that there were hardships present which made it
desirable to contract out. Moreover, the right of appeal did not
mitigate unreasonableness because few appeals against retention
succeeded and appeals resulting in a reduction of the transfer fee
did not substantially touch on the vice of the system. The High Court
agreed with these reasons, and held that an additional reason why
the rules were too wide was because they prevented a player who
had ceased to play for one club from playing for any other without
taking into account how briefly he had played for the first club or
how long a time had elapsed since he had played. Also, the transfer
fee could be fixed at a level quite unrelated to any benefit the player
might have had from his association with the club; its size could
adversely affect the chance of an engagement elsewhere and the
remuneration offered. In the Blackler case, the rule giving the New
Zealand Rugby League a right to prevent players from playing
abroad was held void; it gave a discretion unrestricted in point of
time and area which might well be operated unreasonably, particu-
124 Cameron v. Canadian Factors Corporation Ltd. supra, f.n.118, 585-586
per Laskin J.; the same test was applied in National Chemsearch Corporation
Caribbean v. Davidson, supra, f.n.58. See also American Building Maintenance
Co. Ltd. v. Shandley, supra, f.n.66; and Stenhouse Australia Ltd. v. Phillips,
supra, f.n.21.
125 Supra, f.n.9 (Full Court); supra, f.n.12 (High Court).
McGILL LAW JOURNAL
[Vol. 21
larly since a player’s “skills and strength are marketable for a few
years only”.120
Differefit issues arose in the Daiwood case.12
7 Hope J. said that
the lack of any time limit for the prohibition on the use of the name
“Dalwood” in conjunction with the property sold would make it
unreasonable. A permissible period would be that
… during which the name “Dalwood” would be likely to be associated
by the public or by the wine trade with the property conveyed to the
[covenantor], and I do not think that the difficulty in estimating this
period justifies a permanent restraint, 28
But this view seems to rest on a confusion between the facts actually
before the Court and those of a typical goodwill case. In a goodwill
case, the seller agrees not to compete with the business sold. In this
case, the buyer agreed not to compete with another business in which
a company associated with the seller was concerned. What was
relevant, therefore, was how long the public would associate the name
“Dalwood” not with the property sold but rather with the business
protected, or perhaps some lesser period considered sufficiently long
to protect the rights of the covenantee’s associate to trade without
this kind of competition.
It is a well-established principle that the reasonableness of a
covenant does not depend on adequacy of consideration.- 9 Several
recent cases indicate, however, that in determining reasonableness,
it is appropriate to take into account the relative obligations imposed
on the two parties. In Instone v. A. Schroeder Music Publishing Co.,
Ltd.20 the plaintiff was a young song writer who assigned to the
defendant music publishers full copyright for the whole world in his
works then existing as well as those composed in the five following
years. In return, he would receive 50 in advance of royalties, which
payment would be repeated upon recoupment by the defendant
publishers. The Court of Appeal said that there was
… a great difference between cases of restrictions on trade during an
employment or engagement and those after the contract has come to
an end… . It is far less likely that a restriction during the continuance
of a contract would be inimical to the public interest.’ 3l
However, they agreed with Plowman J. in holding that the case before
them was one of the exceptional instances of invalidity. There was
120 Supra, f.n.8, 572 per McCarthy 1.
’12 Supra, f.n.14.
128 Ibid., 696.
129 Supra, f.n.2.
13 Supra, f.n.25; see also Clifford Sons Management Ltd. v. W.E.A. Records
Ltd. [1975] 1 W.L.R. 61.
’31Ibid., 178 per Russell L..
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
349
no obligation on the defendant to exploit any composition of the
plaintiff: he might in effect be left with no outlet, the maximum
payment due to him being the 50 advance royalties, with no right
at the end of the five years to recover the copyright of unused
compositions. The contract did not accord with standard practice.
The House of Lords, in dismissing the appeal, pointed also to the
inequality of bargaining power. In Pyle v. Sharp Bros. Pty. Ltd.,1 22
however, lack of reciprocity of obligation did not make the covenant
unreasonable. The covenantor was bound to sell a covenantee’s
products but the covenantee in certain circumstances was not obliged
to keep him supplied. It was held that since the covenantor could
leave the agreement on seven days notice and compete elsewhere in
the same city outside a certain area, the lack of reciprocity was not
unreasonable.
Finally, the Amoco caselm also discussed the extent to which
reasonableness of a covenant should take into account the interests
of the covenantor. Menzies J.’24 and Gibbs J. 3 5 in the High Court
agreed with the trial judge that it was proper to balance the ad-
vantages received by the covenantor against the disadvantages of
the covenant to him. Bray C.J. in the Full Court and Walsh J. took a
compromise position. Thus, Walsh J. stated that although the test
is whether the restraint does no more than adequately protect the
covenantee’s interests, independently of any benefits conferred on
the covenantor,
the quantum of the benefit which the covenantor receives may be
…
taken into account in determining whether the restraint does or does not
go beyond adequate protection for the interests of the covenantee. For
example, if a large sum is advanced a longer period of restraint may be
held to be required to give adequate protection to the covenantee than that
which would be appropriate in the case of a small advance.136
However, despite the refusal of Bray C.J. and Walsh J. to depart
completely from orthodoxy, their consideration of the hardships on
the covenantor in that case often seems to have occurred without
reference to whether these were necessary to protect the covenantee.
In Amoco 3 7 a fifteen year solus agreement for the supply of
petrol by Amoco to Rocca was found to be reasonable by the trial
judge (Wells J.), but his decision was not upheld by the Full Court
or by the High Court of Australia. Wells J. admitted two items of
32 Supra, f.n.80.
1
133 Supra, f.n.24.
14 Ibid., 389.
135 Ibid., 407-408.
136 Ibid., 399.
137 Ibid.
McGILL LAW JOURNAL
[Vol. 21
expert economic evidence on the issue of reasonableness between
the parties. Amoco’s Economic and Planning Manager estimated on
the basis of available facts that after fifteen years the project would
yield 10.2% profitability on a discounted cash flow basis. Anything
below that would be too little to raise capital. This evidence was
critically scrutinized by an expert economist, who concluded that
Amoco had been cautious, and up to 17% profitability might be
expected. In spite of this evidence, Wells J. held that, considering
all of the circumstances of the case, the agreement was valid.
In the Full Court, Hogarth J. considered that the crucial term
was the fifteen year tie; the others merely aided the operation of
that tie. Without considering the expert economist’s evidence, he said
that Amoco’s own evidence showed they had taken too gloomy a
view and therefore about 10% profitability could have been achieved
with a shorter term. Bray C.J. (Walters J. concurring) also found
the covenants unreasonable, relying in addition on the expert’s
evidence. He stressed the positive duty to stay open, even at a loss;
Amoco’s right not to supply petrol if its sources dried up; 138 the duty
to pay cash on delivery; Amoco’s right to determine after ten years;
and the fact that the rebate was fixed at 2.5 cents a gallon (without
taking into account possible inflation) and was not proportioned to
the duration of the term. The majority of the High Court agreed
substantially with Bray C.J.’s reasons and stated that even if the
terms other than duration had been less onerous, the agreement
would still have been void. Although members of the High Court
expressed different views as to the weight of the expert economic
evidence, no doubts as to its admissibility were expressed. 3 0
Public Interest
Beginning with the Esso decision, several recent cases have
examined what factors should be considered and what kinds of
evidence are admissible in determining whether a covenant is against
the public interest. In the Esso case, the House of Lords, in stressing
the importance of considering the effects of solus agreement cases
on the public, relied on a Monopolies Commission report on the
supply of petrol for information about the U.K. petrol distribution
industry.’ 40 Some have seen a check to this development in Phar-
maceutical Society of Great Britain v. Dickson’4 1 in which Lord
138 Cf. Rhodesian Milling Co. (Pvt.) Ltd. v. Super Bakery (Pvt.) Ltd., supra,
f.n.36.
139 Supra, f.n.24, 390 per Menzies J., 402 per Walsh J., 413 per Gibbs J.
14o Supra, f.n.4.
141 Supra, f.n.31.
19751
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
351
Wilberforce expressed doubts as to whether evidence that restraints
would cause a reduction in the number of pharmacies could properly
be considered in relation to the common law restraint of trade
doctrine ( as opposed to proceedings in the Restrictive Practices
Court).
But in Amoco Wells J. did not doubt the relevance of similar
evidence as to the public interest. An expert economist stated five
year ties were desirable in that they gave some stability but also
allowed some scope for new entrants to woo the twenty percent of
covenantors whose agreements would come up for renewal each
year. Fifteen year ties, on the other hand, ensured that fewer ties
terminated each year so that fewer sites became available. This
substantially reduced the possibility of competition, because the
huge costs of entry made it necessary for new entrants to obtain
many outlets quickly in order to enjoy economies of scale. In spite
of this evidence, Wells J. held that the fifteen year tie was not against
public interest because the reduction in competition and the resulting
loss in efficiency were outweighed by the benefits of solus agreement
contracts and the public interest in sanctity of contracts. It was not
necessary for the Full Court and the High Court to consider these
public interest questions.
In the Pamag.4 2 case, the High Court held that the agreement
was not against the public interest, since it would not lead to a
monopoly, or to an increase in prices. Indeed, Stephen J. thought
that if such agreements were not made, there would be a risk of
vertical integration in the flour-bread trade which would in the long
run reduce competition.- 3
Sherk v. Horwitz'” is an important Canadian decision discussing
what factors will be considered in employee cases in determining
reasonableness according to the public interest. The defendant was
an obstetrician employed by an Ontario medical centre. He agreed
that on termination of his employment, he would not practicekany
branch of medicine or surgery within five miles of the city for five
years. Donohue J. held the covenant void for several reasons. First,
in his four years’ work the covenantor had treated thousands of
patients, including 2,800 in his last year. It was wrong that they
should be deprived of treatment by him during and after pregnancy:
“No answer is to be found in saying that these people … can easily
142 Supra, frn.17.
43 Ibid., 66.
144 (1971) 25 D.L.R. (3d) 675 (Ont. H.C.); aff’d on other grounds (1972) 31
D.L.R. (3d) 152 (Ont. C.A.).
McGILL LAW JOURNAL
[Vol. 21
find another specialist. Choosing a physician or surgeon is not akin
to commercial transactions.”‘145 Secondly, there were only half the
proper number of obstetricians in the area. It was therefore against
the public interest for the covenantor to be restrained from working.
(This will of course only be so if other areas are not short of
doctors.) 14 6 Thirdly, the same conclusion was supported by other
pieces of evidence as to public policy. Local legislation 1I was
directed towards providing the widest medical care for Ontario
residents; hence the public were entitled to the widest choice in the
selection of their medical practitioners. Further, in May 1971, the
Council of the Ontario Medical Association had expressed disap-
proval of restrictive covenants in contracts between physicians.
Finally, the medical profession was in a strong monopoly position
and the right of the public to deal with it should not be weakened
further by restrictive covenants between doctors. The Ontario Court
of Appeal upheld the decision, but on the ground that the defendants
had failed to establish any proprietary interest under the covenant
in question; the Court expressed no opinion on the reasons for
judgment given by the High Court.’ 4
The admissibility of evidence relating to the effects of an agree-
ment on the public may make the common law restraint of trade
doctrine a supplement to and a partial substitute for a system of
antitrust legislation. The cases discussed above indicate that “public
interest” is not to be interpreted restrictively as referring only to
the interest the public has in freedom of trading, but may include
the effects of an agreement on general economic and social condi-
tions by which the public may be affected. In this respect, the doc-
trine may be at the threshold of one of its greatest advances.
Indeed, in Texaco Ltd. v. Mulberry Filling Station Ltd.149 counsel for
the covenantor took a more extreme approach in seeking to have a
petrol solus agreement declared invalid even though it lasted only
four years seven months. It was argued that certain terms of the
covenant providing for a low rate of interest on a loan from the
supplier to the retailer were factors to consider in determining
whether the covenant was against the public interest. It was
claimed that the low interest resulted in a misallocation of resources
and a raising of the price to the consumer, that it induced the
retailer to enter the trade ignorant of the true costs involved (since
145 Ibid., 678; and see Willman v. Bekeler 499 S.W. (2d) 770 (1973), 777.
146 Green v. Stanton (1969) 6 D.L.R. (3d) 680 (B.C. CA.).
147 E.g., Health Services Insurance Act, R.S.O. 1970, c.200.
48 Supra, f.n.144.
3
349 Supra, f.n.92.
1975J
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
353
a high price might be charged to offset the low interest rate), and
that it subsidized inefficient retailers to the detriment of the public.
It was further argued that if the solus tie system were abolished,
prices might fall, and that the system did not cause economies of
scale in distribution.
Ungoed-Thomas J. rejected all of these arguments on the grounds
they were not supported by the evidence. He then expressed doubts
as to whether it had been proper to raise these issues in the first
place. He thought they were essentially policy matters for business
administration, government, or Parliament. In his view, the restraint
of trade doctrine was principally concerned with the personal liberty
of the citizen rather than “the utmost economic advantage”. 50
“Reasonableness with reference to the public” meant simply that
“the public has an interest in men being able to trade freely subject,
inter alia, to reasonable limitations which conform with the con-
temporary organisation of trade”.15′ He added that if the phrase
… refers to interests of the public at large, it might not only involve
balancing a mass of conflicting economic, social and other interests which
a court of law might be ill-adapted to achieve; but, more important,
interests of the public at large would lack sufficiently specific formulation
to be capable of judicial as contrasted with unregulated personal decision
and application. 52
There is much force in what Ungoed-Thomas J. says, but it is
suggested he has responded too strongly to some very ill-supported
appeals to the public interest. The court in evaluating the public
interest is not asked to act as a benevolent despot, working out an
ideal order of society; it is merely asked to prevent agreements
from being enforced which have a clearly proved adverse effect on
non-parties. Such an effect will doubtless be difficult to prove,
particularly if there is no convenient extrinsic evidence like the
Monopolies Commission Report on Petrol in the Esso case,15 or
the documents considered in Sherk v. Horwitz,5 4 or the economic
evidence in Amoco,’ 5 but that is not a reason for refusing to let
litigants prove it when they can.
150 Ibid., 827.
151 Ibid., 829.
152 Ibid., 827.
153 Supra, f.n.5.
16 Supra, f.n.144.
156 Supra, f.n.24.
McGILL LAW JOURNAL
[Vol. 21
Remedies
Until recently, a contract that was found to be in unreasonable
restraint of trade was unenforceable, yet a person who had suffered
as a result of it had no positive remedies. But major changes have
occurred in the last decade. Declarations have been granted at the
suit of footballers to the effect that agreements to which they were
not parties but which prevented them from playing for the em-
ployers they wished were in unreasonable restraint of trade.’,” In
Nagle v. Feilden15 7 the Court of Appeal held, in proceedings similar
to demurrer, that where the stewards of the Jockey Club of England
abused their monopoly power over entry to the trade by excluding
women, the plaintiff established a prima facie case for having the
practice declared void as against public policy, and for obtaining
injunctions to restrain the defendants from following the practice,
and for an order either to grant the plaintiff a licence or to consider
any future application on its merits. The High Court of Australia
has even said that a final injuction would lie to prevent such agree-
ments being acted on or such practices continued. 58 And there has
been a suggestion that powers or practices of trade unions by which
persons are expelled or refused membership may be declared un-
reasonable as interfering with the right to .work. 19
These developments, particularly the possible grant of an in-
junction, are very welcome in that they overcome the danger that
restraints beneficial to parties who agreed on them will never be
upset although they affect third party rights. But certain problems
arise from these developments. One relatively minor difficulty is
based on the fact that monopolies and cartels are usually thought to
be matters for the legislature. So far as the legislation deals only
with agreements and monopolies respecting the supply of goods,
there is no conflict with Parliamentry policy: Parliament has left a
gap which the common law should fill. Even if there is no gap, the
provision of additional means of enforcement would seem to be a
fulfilment of the legislative policy, not its destruction.
Another problem concerns the availability of damages. In Cooke
v. Football Association 0 the plaintiff was an Irish player who wished
156 Eastham v. Newcastle United Football Club Ltd., supra, f.n.8; Blackler
v. New Zealand Rugby Football League Ltd., supra, fmn.8; Elford v. Buckley,
supra, f.n.7. See also Pharmaceutical Society of Great Britain v. Dickson,
supra, f.n.31.
157 Supra, f.n.50.
158Buckley v. Tutty (1971) 125 C.L.R. 353, 379-382.
119Edwvards v. S.O.G.A.T., supra, f.n.51.
160 The Times, March 24, 1972; [1972] C.L. 516.
1975J
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
355
to join an English club. The defendant, acting in accordance with
the rules of F.I.F.A., the game’s international governing body, refused
to register the plaintiff’s transfer until his club approved. Foster J.
held that although these rules might be in unreasonable restraint
of trade, the plaintiff could not recover damages. Such a decision
would seem to be questionable if the “right to work” arises from the
development of the restraint of trade doctrine in the common law
courts. The injunction would then be granted in equity’s auxiliary
jurisdiction, but it is an odd common law cause of action which
does not sound in damages as of right. The other view is that the
right to work is a purely equitable creation, so that the injunction
is granted in equity’s exclusive jurisdiction. If so, it seems curious
that no discussion has occurred as to the availability of an award of
damages (which may be possible in respect of a purely equitable
interest)'”‘
in lieu of or in substitution for an injunction under Lord
Cairns’ Act.0 2 In the case of aging footballers, the availability of
damages for past losses is probably a matter of more pressing
concern than an injunction to protect a future right to work, which
may be of declining value. Lord Denning said in Nagle v. Feilden0 3
that damages only lie for torts or breaches of contracts. Why cannot
this conduct be regarded as tortious, like that covered by any of
the economic torts? While damages would often be hard to calculate,
this is not usually considered to be a valid objection to the re-
cognition of a right to damages.
Difficulties may also arise with respect to the injunction. If it is
negative, requiring the parties not to act on their agreement, it may
be ineffective, for the defendants may reply untruthfully that their
actions are based on other factors. If it is positive, requiring a club
to employ a player, for example, it would be contrary to equity’s
dislike of compelling parties between whom there is ill-feeling to
work together, particularly when they have not yet contracted to do
so. In Nagle v. Feilden the Court of Appeal held there was jurisdiction
to grant the relief sought, which included a positive injunction re-
quiring the defendant either to grant the licence or to give a future
application proper consideration. In cases of this kind, it will be
hard for the Courts to penetrate behind sham statements by the
defendants such as: “Mrs Nagle, we will not grant you a licence to
train, not because you are a woman –
but because you are inefficient, or of bad character, or too old, etc.”
that policy has changed –
161Eastvood v. Lever (1963) 4 De G.J. & S. 114, 128, 46 E.R. 859, 865 per
Knight Bruce LJ.; Elliston v. Reacher [1908] 2 Ch. 374, 395 per Parker 1.
10221 and 22 Vict., c.27, s.2.
16 Supra, f.n.50, 646.
McGILL LAW JOURNAL
[Vol. 21
But at least in cartel cases, one of the cartelists will probably be
more eager to break the agreement than the others. The effect of
a declaration and a negative injunction is to make the cartel much
more difficult to enforce.
Revolutionary though the recognition of the right to work is on
the face of it, its implications may be even more serious. If single
professionals or employees can obtain the above remedies, perhaps
business concerns which are the victims of boycotts can also obtain
them. But an anomalous decision to the contrary is Adrian Messenger
Services and Enterprises Ltd. v. The Jockey Club Ltd.1′ where the
defendant, who had a near monopoly of racing in Southern Ontario,
successfully resisted the plaintiff company’s action brought in the
Ontario High Court to obtain access to the races for its bet-carrying
messengers. A company’s right to work ought not to be less extensive
than an individual’s. In any event, Buckley v. Tutty, in giving a
private right of action against cartels and monopolies, is at least a
partial undermining of the combined authority of Allen v. Flood0 5
and Lumley v. Gye’66 which assert that if there is no conspiracy,
no interference with contracts and no unlawful means, there is no
liability for intentionally caused trade loss.
It was said earlier that the admission of evidence as to the public
interest would help the common law restraint of trade doctrine
become a supplement to, or even a substitute for, a system of anti-
trust legislation. It operates as a supplement, as has been seen, in
that the common law has recognized private causes of action for
individuals injured by cartels and monopolies to which they are
not parties. Indeed, it operates as both supplement and substitute
if the legislation does not grant private rights of action so that the
vindication of public and private rights would otherwise depend
entirely on the efficiency and honesty of state officials. It is also
a substitute so far as it extends to conduct either not covered by
antitrust statutes or only partially covered. Such statutes sometimes
proscribe cartels more fully than monopolies: they may condemn
restrictions on the terms of dealing rather than refusals to deal at
all. But the common law has been applied to refusals to admit in-
dividuals to trade associations and trade unions, and to expulsions
of individuals from these bodies; arguably, certain refusals to buy
goods or services or to permit companies to trade should be treated
the same way as a refusal to permit a man to work. Finally, the
364 [1972] O.R. 369.
165 [1898] A.C. 1.
166 (1853) 2 E. & B. 216.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
357
common law of its nature gives courts flexibility and creativity in
meeting unforeseen problems; on the other hand, a particular
antitrust statute may deny such powers to the courts in their
administration of that statute.
Severance
In T. Lucas & Co. Ltd. v. Mitchell 67 Pennycuick V.-C. refused to
sever a restriction in a covenant which prohibited the covenantor
from dealing in certain goods in a particular area from a restriction
in the same clause prohibiting the solicitation of orders for those
goods. He stated that even though the latter part of the clause
would be unreasonable if it stood alone, its severance from the re-
mainder of the clause would give it a meaning “different in kind as
well as in extent”.168 The Court of Appeal disagreed on this point;1 9
more importantly, the Court refused to -follow the views of Atkin
and Younger L.JI. in Attwood v. Lamont,’1* which were based on
Lord Moulton’s remarks in Mason v. Provident Clothing and Supply
Co. Ltd.17 1 that the courts should not sever employee covenants unless
the part of the covenant which is unreasonable is merely trivial
and not an essential part of the agreement. It would seem, therefore,
that the present rule is that:
… if you find two restraints which as a matter of construction are to
be regarded as intended by the parties to be separate and severable, and
the excision of the unenforceable restraint being capable of being made
without other addition or modification, there is no third question, even
in master and servant cases. 172
Statutory reform has gone further. The New Zealand Illegal
Contracts Act, 1970173 has abolished the blue pencil test. Its abolition
has been recommended in New South Wales; 7 4 the proposal is that
the court will have a discretion to refuse to modify a promise in
167 Supra, f.n.116. See also Amoco Australia Pty. Ltd. v. Rocca Bros. Motor
Engineering Co. Pty. Ltd. (No.2) (1975) 5 A.L.R. 65.
108 Ibid., 948.
169 Ibid., 938.
“To [1920] 2 K.B. 571, 593.
‘l [1913] A.C. 724, 745.
172 T. Lucas & Co. Ltd. v. Mitchell, supra, f.n.116, 939. Cf. E.P. Chester Ltd. v.
Mastorkis (1968) 70 D.L.R. (2d) 133; Furlong v. Burns & Co. (1964) 43 D.L.R.
(2d) 689; and Cameron v. Bray Gibb & Co. (Pvt.) Ltd. 1966 (3) SA. 675.
173 New Zealand Statutes, 1970, No.129, s.8.
174Report of
the N.S.W. Law Reform Commission on Covenants in
Restraint of Trade (1970), 9.
McGILL LAW JOURNAL
[Vol. 21
restraint of trade to make it enforceable if the reason it is against
public policy is because of a manifest failure to attempt to make a
reasonable promise. In America, where the blue pencil test has been
abolished by the common law courts in many jurisdictions, there is
a similar inherent equitable discretion not to modify void covenants
on the ground that the covenantee has unclean hands (for example,
where he has shown bad faith or deliberate oppression).175
If an employer promises his employee a pension, or a share of
profits or commissions, provided that he does not compete after
leaving employment, can the employee sue? In America, there is a
common view that the employer need not pay if the condition on
which paynient depends has not been performed; the condition is
valid because the restraint of trade doctrine does not apply to
conditions, only to contracts. 176 This view is not shared by the
majority of Commonwealth courts or by some American courts.17
1
But assuming the condition is an unreasonable restraint of trade,
a bewildering number of views as to whether the employer remains
bound to pay is possible. First, the employer need not pay if what is
against public policy is not the condition but rather the employer’s
conditional promise to pay, for that provides the incentive to the
employee to cease trading. 7 s Secondly, the employer need not pay
if payment was only to be made on the understanding that the
condition was valid, whether or not it is in fact performed. 10
Thirdly, the employer need not pay if the promise to pay is in-
severably dependent on performance of the condition so that, if
the employer had to make the payment without the condition being
fulfilled, the nature of his obligation would fundamentally alter. On
this view, the right to each instalment depends on performance of
the condition; and the condition is not a means of defeating a vested
175 See, e.g., Insurance Center, Inc. v. Taylor 499 P. 2d 1252 (1972).
176 Brown Store Works, Inc. v. Kimsey 167 S.E. 2d. 693 (1969); Allredge v.
City National Bank and Trust Co. of Kansas City 468 S.W. 2d. 1 (1971);
Rochester Corp. v. Rochester 450 F. 2d. 118 (1971); Swift v. Shop Rite Food
Stores, Inc. 489 P. 2d. 881 (1971). See also Inglis v. Great West Assurances Co.
[1941] O.R. 305; and Ronayne v. Howard F. Hudson Pty. Ltd. (1970) 71
S.R.N.S.W. 269, 278 per Asprey J.A. (diss.).
177Wyatt v. Kreglinger and Fernau [1933] 1 K.B. 793; Bull v. Pitney-Bowes,
Ltd. [1966] 3 All E.R. 384; Howard F. Hudson Pty. Ltd. v. Ronayne (1972) 46
A.L.J.R. 173; and see Muggill v. Reuben H. Donnelley Corp. 398 P. 2d 147 (1965).
178 Wyatt v. Kreglinger and Fernau, ibid.; and the Ronayne case, ibid., 177
per Owen 1., 180 per Walsh J., 181 per Gibbs 1.
’11 Ronayne, ibid., 179 per Walsh 1.
1975]
RECENT DEVELOPMENTS IN RESTRAINT OF TRADE
359
right.18 0 Fourthly, the employer may have to pay if the condition is
severable and operates in defeasance of a right conferred elsewhere
rather than as a statement of the conditions subject to which the
right came into existence.8 ” Fifthly, the employer need not pay
if the promise to pay was made at the termination of a contract
of employment as part of a simple contract, because there is no
seal or valuable consideration other than the void condition to sup-
port his promise. 82 The employer may have to pay if the promise
was made during a contract of employment rather than at its
termination and there is some consideration (apart from the void
condition) in the form of the employee’s work, provided severance
is possible on ordinary principles. 8 3 On this view, pension rights are
earned, though deferred, compensation which should not be forfeited
by unreasonable restraints of trade.
The application of the doctrine to these conditions is undoubt-
edly sound in that they may restrain trade as much as express
restrictive agreements do. But the law may operate as a serious trap
to the employee. He thinks he is getting a pension; in fact, as we
have seen, the employer’s promise may be entirely unenforceable.
This is one area where a wider doctrine of severance would be
beneficial.
Conclusion
The last decade has witnessed great changes in the restraint of
trade doctrine, and there have been intimations of even greater ones
to come. The notion of “trade” now includes the use of trade names
and professional sport; “restraint” has widened to include restric-
tions on competition in pension schemes. Since the Esso case,8 0
the frontiers of the doctrine now extend well beyond the traditional
categories to include such important transactions and institutions
as solus agreements and trade association rules; there is some
180 This appears to be the actual ratio decidendi of the Ronayne case, supra,
f.n.176, 280 per AspreyJ.A. and supra, f.n.177, 177 per MenziesJ., 179 per
Walsh J., and 181 per Gibbs J. See also Bull v. Pitney-Bowes, Ltd., supra, f.n.177;
and the Ronayne case, supra, f.n.176, 287 per Holmes and Mason JJ.A. and
supra, f.n.177, 174 per Barwick CJ.
8’8 Re Prudential Assurance Co.’s Trust Deed [1934] 1 Ch. 338 and Bull v.
Pitney-Bowes, Ltd., supra, f.n.177, as interpreted in the Ronayne case, supra,
f.n.177, 181 per Gibbs J.; see also Taylor v. McQuilkin (1968) 2 D.L.R. (3d) 463.
182 Ronayne case, ibid., 174 per Barwick CJ., and 178, 189 per Walsh J.
183 Ronayne case, ibid., 180 per Walsh J.
184 Supra, f.n.5.
360
McGILL LAW JOURNAL
[Vol. 21
authority ,for the radical but desirable view that all restraints of trade
fall within the doctrine. More interests of a “commercial” kind have
been recognized as capable of protection, particularly the general
health of whole industries. The courts have taken up the suggestions
of the House of Lords in the Esso case that there should be more
stress on the public interest, and new kinds of evidence have been
admitted to permit its effective investigation. Declarations have
been granted to third parties, and the possibility of injunctions has
been authoritatively supported. The severance doctrine may be losing
its ancient rigidity. The next decade may reveal whether these de-
velopments are to be ignored, or whether they will be consolidated
and extended to make the restraint of trade doctrine an even more
important method of social control.
