Professional Documents
Culture Documents
Topic 4 Illegality & Void Contracts
Topic 4 Illegality & Void Contracts
• 1 QS: Does the clause therein is restraining a party’s trade OR merely restricting the
manner of the exercise of said trade.
• Thorne J in The Hua Khiow Steamship Co. Ltd v Chop Guan Hin [1930] 1 MC
175 held in the event a clause / agreement is merely restricting the manner of the
exercise of a trade, such clause would not be rendered void under section 28.
“…He may trade even though by contract he has bound
himself to trade in a particular manner.”
- a provision imposing a penalty on traders using the plaintiff’s services if they also
shipped their goods with a competitor, was held not to be in restraint of trade because
the court held that a restriction per se is not void if its prevents a party exercising his
business, provided the restriction merely stipulates that he should exercise it in a
particular manner.
- Nordenfelt, a swedish who was in the business of making and inventing guns and
ammunition, sold his business to Maxim (company in England) for almost
£300,000. The contract of sale contained a covenant that Nordenfelt would not, for
a quarter of a century,
'engage … either directly or indirectly in the trade or business of a manufacture
of guns, gun mountings or carriages, gun powder explosives or ammunition, or
in any business competing or liable to compete in any way with that for the time
being carried on by the company ‘.
- The contract, however, permitted Nordenfelt to deal in explosives other than
gunpowder, in torpedoes or submarine boats and in metal castings or forgings.
- After some years, Nordenfelt entered into a business with a competitor dealing in
guns and ammunition. Maxim sought to stop him from doing this.
HL held: the 1st ROT clause – valid
2nd ROT clause - void
Reasonable if:
• the party imposing the restraint has a
legitimate interest to protect;
• and the restraint is reasonable in the context
of protecting that interest; and
• the restraint is not otherwise contrary to the
public interest.
RoT is justified if it is reasonable having
regards of the interest of party and public.
Held:
The court severed the restraint of trade covenant. It held that the italicised
words (in any business competing or liable to compete in any way with that for
the time being carried on by the company’)were unreasonable (thus void)
therefore, unenforceable because they extended protection to the company for
its future business activities and were not confined to the company's business
as it was at the time of its sale.
The remainder of the covenant in restraint of trade (Nordenfelt would not, for a
quarter of a century, 'engage … either directly or indirectly in the trade or
business of a manufacture of guns, gun mountings or carriages, gun powder
explosives or ammunition), the court held, was reasonable between the
parties, although it covered a wide area, i) firstly, because Nordenfelt received a
large sum of money,
ii) secondly, because Nordenfelt reserved for himself his inventive and
manufacturing skills. (ie Maxim have legitimate interest that must be
protected),
Finally, it was not contrary to public policy since Maxim was an English company
who would be making guns and ammunition for foreign territories, thus
benefitted/contributed to England’s economy.
• The court needs to consider:
i) the length of time for which it will operate;
ii) the geographical area which it will cover;
iii) the scope of the restraint (that is, the range
of activities covered)
• Eg: if a business is sold in one town, a
restriction preventing the opening of a similar
business anywhere in the country would be
unlikely to be regarded as unreasonable. – too
wide
• In Mason v Provident Clothing Co, a canvasser
who had been employed to sell clothes in
Islington was restrained from entering into
similar business within 25 miles of London.
This was held to be too wide
• The type of activity (scope of business) restrained must
also be related to the interest being protected.
• A clause restraining someone who had been employed as
a chiropodist from working as a hairdresser would be
unlikely to be regarded as reasonable.
• A baker cannot restrain his employee, who was engaged to
sell bread, from starting a restaurant business, even
though the baker himself presently runs one or may do so
in the future (Bromley v Smith [1909] 2 KB 235).
• The covenant restraining the employee from selling 'milk
or dairy produce' not to include his employment with a
grocer who sold butter and cheese (Home Counties Dairies
Ltd v Skilton [1970] 1 WLR 526)
• Qs: what is the legitimate interest that party
must protect? Whether the party has one?
• Eg : Sale of goodwill – Buyer – legitimate
interest? Money invested?
• Partnership – existing customer? Confidential
info? Business connection? Trade secret?
Interest of Buyer?
• The seller’s ‘know how’, client base and reputation in the market
area collectively form part of the business goodwill, which is a
very important intangible asset as it represents a portion of the
business’ value that can’t be attributed to any of its other assets.
• In other words, it’s a commercial reality that a business’
goodwill represents an immaterial property right that’s worthy
of protection. Which leads us to the key purpose of a restraint of
trade provision in the sale of a business: to protect its so-
called goodwill.
• Also, any new purchaser of a business requires the security of
knowing that the seller (who is equipped with the experience,
contacts and ‘reputation’) won’t initially go on to compete with
his or her former business. This initial time period will be
determined so as to allow the new owner to (re-)establish the
business in the market.
Interest of the Public?
• relation to a restraint on the work of a leading
artist, playwright, doctor or scientist, whose
work might well be for the public benefit.
• So does for type of business. Whether to
restraint the D from engaging into that type of
business affects the public choice/option?
Lead to monopoly?
• See Thomas Cowan Co Ltd v Orme [1961]
• In Smile Inc Dental Surgeons Pte Ltd v Lui Andrew Stewart
[2011] SGHC 241, the clause in question was also found to be
too wide and, hence, unreasonable.
• The Singapore High Court noted that the restraint was not
limited to the clinic at which the employee worked, but
included all other clinics set up by the company. It would cover
all of the company’s patients even if the employee had not
been involved in their treatment.
• There was also no time-limit on the period of restriction. All
these suggested that, over and above protecting the company’s
customer base, the clause was intended to prevent the
employee from ever competing with the company. This went
further than what could be legitimately protected and the court
held the clause to be void as being in restraint of trade.
Thomas Cowan Co Ltd v Orme [1961]
D entered into a contract of service with the P
who were carrying on business as White Ant and General Pest Exterminators &Fumiga
tors. He covenanted that, on leaving the P’s employment, he would not "carry on the
business of White Ant Exterminator or Fumigator anywhere in the Island of Singapore
either by himself or in partnership with others nor shall he take employment with any
person, firm or corporation carrying on the business of White Ant Exterminators or Fu
migators or any such similar business until the period of three years has expired".
After leaving the plaintiffs` employment, the defendant became a director in the Fumi
gation & Pest Control Co Ltd, a company carrying on business as White Ant and Gener
al Pest Exterminators and Fumigators. The P brought action to restrain the D
from being in breach of the above covenant.
Held:
Though the covenant was reasonably necessary for the protection of the Ps` business
with regard to space and time as well as the nature of the defendant`s employment, it
was against public policy since to prevent the defendant from operating as a fumigato
r in Singapore would give the P a virtual monopoly of the business.
Hence the covenant was void and could not be enforced.
• Burden of proof
i) Covenantee must prove the restraint is
reasonable to protect his interest (legitimacy
of interest)
ii) The party challenging the covenant must
prove the restraint tends to injure the public.
In summary:
- If the clause is ROT clause, s 28 applies - VOID
- If one of the exceptions applies OR the clause
merely restricts the manner of which the trade is
to be carried on, the ROT is valid.
- How to prove the exception applies?
i) Must prove the clause is in either sale of
goodwill contract, or in partnership agreement.
ii) If yes, the restraint must be reasonable .
- Advise accordingly