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Restraint OF Trade Tutorial
Contract Law II (LXEB 1122/LIA 1009)
Universiti Malaya
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RESTRAINT OF TRADE
- Charmaine and Rosita are best friends and had carried out a successful catering business since the year 2002 in Taman Ratu, Kuala Lumpur. Their business, Seri Suri Catering, was known for its delicious food and efficient services around the Klang Valley. Rosita and Charmaine became popular and won several awards for being successful female entrepreneurs. In 2019, Charmaine was diagnosed with second stage breast cancer which required immediate treatment. During her period of remission, Charmaine decided that she could no longer handle the stress of managing the business and wanted to sell off her share of the business. Rosita agreed although she felt sad for losing her business partner. They both agreed to officially sign a contract to terminate their partnership. Both of them then signed an agreement on 15 July 2019 which stipulated, among others: ‘It is agreed by Rosita and Chamaine that: (i) Our partnership is dissolved as of today. (ii) Charmaine will not carry out any catering business within one hundred kilometers radius of the business office of Seri Suri Catering in Taman Ratu for 10 years.’ RESTRAINT OF TRADE AND DISSOLUTION HAPPENED ON THE SAME DAY After a year had passed, Charmaine was told that she was totally free of cancer after a series of successful treatments and surgery. She then began to feel restless and planned to start a small scale catering business, aiming just to cater for small office functions from her own house in Shah Alam which was 75 kilometres away from Taman Ratu. She is, however, concerned with the second clause of the agreement she had signed with Rosita.
(a) Advise Charmaine. (b) Would your answer differ if Charmaine decided to start a business to supply catering equipment instead? NOT DISTURBING ROSITA’S BUSINESS AT ALL OR HER CLIENTEL
Restraint of trade, prohibiting someone from performing their trade. You are prohibited from working in a PARTICULAR AREA (this is restraint of trade). Elements in Wrigglesworth
S28 of the CA states that agreement in restraint of trade is void. However, this section also states the phrase ‘to that extent’ which means that if the whole agreements is with the aim to restrain trade then the whole agreement would be void but if the agreement contains a clause which aims at restraining trade then only that clause would be void. In Wrigglesworth v Wilson Anthony, an advocate and solicitor had an agreement with his current employer where he is restrained from practicing his profession within five miles from Kota Bharu for a period of two years after the termination of his employment. It was held that the agreement is
void under section 28. For a restraint to happen, it would NORMALLY include a prohibition of livelihood, within a specified radius and a time limit is prescribed. The general question to ask is are you restrained from performing your profession. If the answer is yes, then there is a restraint. In Stamford College Group v Raja Abdullah Raja Othman, the restrictive clause threatened the livelihood of the defendants, therefore it was rendered void. (lecturer cannot lecture)
There are, however, 3 exceptions to this section. The first exception is the saving of agreement not to carry on business of which goodwill is sold. These are intangible assets that carries value to the business including reputation, customer loyalty and the quality of products). JUST BECAUSE A BUSINESS IS BEING SOLD, DOES NOT MEAN GOODWILL IS BEING SOLD. & LIMIT MUST BE REASONABLE.
Secondly is the agreement between partners prior to the dissolution of the partnership. In Millenium Medicare, it was established that in order for this exception to be applied, there are some elements that need to be proven. Firstly, the agreement must only be made between partners at the time of the contract (person to be partner after the contract is made cannot be a party) and that the restrictive covenant must be made upon or in anticipation of a dissolution of the partnership (dissolution here means per the partnership act, and the whole partnership is dissolved in its entirety). In anticipation here means that the partners have anticipated that something would probably happen (needs to be proven). Within such local limits is dependent on what is reasonable and that depends on the nature of the business. In Deacons v Bridge a solicitor was restrained in the entire of Hong Kong for 5 years which was deemed unreasonable. In Millenium Medicare, 15km for 5 years is considered reasonable.
Thirdly is an agreement made during the continuation of a partnership. The partners may agree that some or all of them will not carry on any business, other than the partnership, during the continuance of the partnership.
S28 only applies to contracts that restraints a person after the initial contract was terminated. In Polygram Records v The Search the courts concluded that S28 only applies to post-contractual period. There was a clause that restricted the crew from making any recordings for 2 years after the expiry of their contract is void ab initio. During the contract,
Restraint OF Trade Tutorial
Course: Contract Law II (LXEB 1122/LIA 1009)
University: Universiti Malaya
