Types of Restraint Clauses

Q.1.

The issue that arises in this situation relates to validity of the restraint clauses with respect to the respective contracts between Charlie on one hand and Keith and Natalie on the other. Common law permits the use of restraint clauses under certain conditions. Restraint clauses can be expressly added into contracts of employment restraining employees from solicitation of clients, working with competitors for a specified time period, and breaching confidentiality. Restraints imposed on employees should be reasonable in order to be valid and legally enforceable; thus, restraints can be valid if employer needs protection in some proprietary interest, such as trade secrets. Restraint clauses that are meant to restrict employees from certain actions after the termination of their employment are generally unenforceable on the grounds of public policy, unless they can be established as being reasonable, necessary for protection of business interests, and limited by duration. Thus, restrictions that are limited to prohibiting working with competitors applicable for a reasonable period of time, and exercisable within a specified area may be considered reasonable.

Restraint can also be considered to be reasonable if the employee has access to important or confidential information, such as trade secrets; however, in such cases restrictions are applicable only with respect to employees that have confidential information by virtue of their job and not skill and knowledge acquired as that is included in employee’s skill. Restraint clauses that are included to prevent the exploitation of trade secrets learned by the servant in the course of his employment can be reasonable. For instance, in Forster v Suggett, where the work manager was engaged in making glass and glass bottles by employing certain confidential methods, the restraint clause provided that he would not for five years after his termination carry out such business in the UK. The court held that the restraint clause was reasonable because it protected the proprietary interest of the employer, was made for a reasonable duration and specified the scope. Importantly, the court held that the employer must establish definitely that employee acquired knowledge of some secret process or mode of manufacture used in business. However, it was held in Herbert Morris v Saxelby that there is no protection for the employer where the trade secret only relates to some method of organisation adopted in the business, or if part of the secret making it impossible for the employee to exploit it.

Restrictions that are made without any reasonable duration can be unreasonable. Therefore, duration is an important aspect to consider in determination of validity of restraint clauses and longer duration of restrictions may be considered unenforceable by the courts. A restraint clause may be considered to be invalid if it affords disproportionate protection to the employer; for this purpose, the court will have consideration to the nature and extent of the trade, employee’s role, and the factors of time and scope of area. If the restriction is lengthy in point of time, and scope of area is wide, then the onus is on the employer to justify its reasonableness. In one case, where the employee was restricted from trading within 25 miles of London, the court held it to be excessive. Similarly, a restriction on a junior reporter from being connected with any other newspaper business within 20 miles of employer’s head office, was held to be void as it was excessive in protecting the employer. Therefore, the employer would have to justify the restraint if the period in which restriction is enforceable is unreasonable and gives disproportionate protection to the employer or where the scope of the area of restriction is too wide.

Lifetime restriction on an employee through a restraint clause has been held to be excessive and invalid in Eastes v Russ. In this situation, Keith is a factory worker, and it is unlikely that he would have complete knowledge of the trade secret that is used by Charlie to manufacture specialised troll dolls. The term of contract of employment is ‘In the event of leaving this employment, you will undertake a lifetime commitment not to work for or own any company dealing in the manufacture of toys, anywhere in the world.’ This is of an unlimited duration and the scope is also not mentioned rather it says that Keith will not be able to undertake work anywhere in the world. As per the authorities discussed above, this is an unreasonable restraint clause. The period of the restriction is for the entire lifetime of Keith and the scope is also unrestricted with Keith being prevented from working anywhere in the world. Therefore, the restriction is excessive and disproportionate and liable to be invalidated by the court. Keith can challenge the clause and start his own business manufacturing Star Wars figurines.

In the case of Natalie, the restraint clause prevents her from working with the competitors of Charlie’s company. This is a non-competition clause. Courts would generally not enforce restrictive covenants that prevent employees from working with competitors unless there is a legitimate interest and the restriction is reasonable. Thus, in order for the clause to be valid, the employer should be able to establish that there is a legitimate interest to protect and the restriction is no wider than is necessary to protect such interest. For testing the reasonableness of the restriction, the court will consider the nature of the restraint, the geographical scope of the restriction, and the duration of the effect of the restriction. In the case of post termination restrictive covenant, the need to establish the scope of the restriction in terms of duration, and geographical scope is important. In this situation, Natalie, the head of marketing, is restricted by the clause that says: ‘In the event of your leaving this company, you undertake not to work for any company specialising in the sale of toys for 10 years within the UK, France, Spain, Russia or the USA.’ The clause provides a long duration of 10 years and a wide geographical scope including UK, France, Spain, Russia or the USA. The question is whether the clause is too restrictive and goes beyond the protection of the legitimate interest of the employer in the case.

In Littlewoods Organisation v Harris, the employee was in a senior position and had confidential information on how the business was operated. There was an agreement between the employee and the employer that he would not work with the principal competitor of the employer for a period of 1 year. The court held the clause to be valid because it was reasonable and limited in duration and geographical scope. If however, the clause had led to the result that the employee would be prevented from working in the industry for a period of unlimited duration anywhere in the world, then the court would have held the clause to be invalid because it was excessive. This was the case in Commercial Plastics Ltd v Vincent, wherein the employee was prevented from working in the industry for 1 year post his termination of employment; the court held the clause to be too wide and therefore, unenforceable against the employee. Applying this to Natalie’s case, it can be said that the 10 year restriction is too long and therefore unreasonable. Moreover, the restriction bars Natalie from working in a wide geographical area. Therefore, it is reasonable to expect that the court shall not enforce the restraint clause as against Natalie.

To conclude, both the restraint clauses with reference to Keith and Natalie’s employment contracts are not enforceable because they are too wide and provide excessive protection to the employer while unreasonably restricting the employee from working in the same industry for an unreasonable period of time. The restraint clauses also operate in a wide geographical area, for which reason, it is clearly void and unenforceable.

Q.2.

The issues that arises in this situation is whether the contracts have been frustrated; whether anticipatory breach is applicable; and what remedies are available in either cases. Frustration is one of the methods of discharge of contract. A contract can be discharged by frustration if performance is prevented due to events that are outside the control of the parties. The court which is deciding on the matter of frustration of contract will consider if the intervening event that prevents the performance of the contract has changed the nature of the obligation to the extent that it is frustrated. Frustration can take place if the subject matter is destroyed or unavailable. In Gamerco Sa, the court held that the contract was frustrated whrn the stadium where Guns N Roses were to perform became unsafe and another venue was not found in time. Contract can be frustrated if legal when formed but becomes illegal at a later time before performance (supervening illegality). In Fibrosa, a contract to sell machinery to a Polish firm was frustrated when Germany annexed Poland and contract became illegal as it was with an enemy country. Government intervention can also go to make the contract frustrated as held in Morgan, where conscription of a comedian in wartime frustrated his contract. In case any of these conditions exist, then the contract can be deemed to be frustrated and it ceases to exist from the moment of frustration.

An important point to note in frustrated contracts relate to rights that have arisen prior to frustration and rights that arise after the frustration of contract. Those rights that are already arisen remain but rights due to arise later are unenforceable. The Law Reform Frustrated Contracts Act 1943 is relevant to this point. Section 1 (2) provides that all prepaid sums are returnable but sums due cease to be payable. Furthermore, Section 1 (2) also provides that expenses incurred prior to the frustration may be asked to be retained or claimed. For contract to be frustrated, it is important that frustration is not caused by the fault of any of the parties; or that such frustration was foreseeable. The doctrine of frustration cannot apply where a party can prove that the other party was in control of the events that led to the destruction of the subject matter of the contract or made it unavailable.

In this situation, the ball was to be held on 30th March and the contracts were entered into on 1st February. At that time, there was no indication or foreseeability of the possible frustration of contract. ‘Iconic for rent’ was paid in advance on the 10th February. The ‘Shire Hotels’ were to be paid on the 8th February and they provided Philippe with a free night’s stay at the hotel on 14th February. ‘Galactic Fed’ was to be paid the balance of £5,500 on 1st May. Due to the lockdown imposed by the government on the 23rd March, all public gatherings were cancelled. As per the principle laid down in Morgan, these contracts were frustrated due to government intervention. Therefore, with regard to the frustration of the contracts, Phillippe can argue that the contracts are frustrated. Phillipe is entitled to recover the advances paid by him to the three parties as per Law Reform Frustrated Contracts Act 1943, Section 1 (2) under which prepaid sums are returnable. However, under the same provision, expenses incurred by the other parties are to be borne by Phillipe because under Section 1 (2), if a payee can retain or claim expenses incurred prior to the frustration. Accordingly, Galactic Fed can claim £500 for the lightening equipment already ordered and The Shire Hotels can claim £1,200 incurred on food, wine, and champagne for the ball as well as charges for the free stay for Phillipe.

With regard to anticipatory breach of contract, the issue arises because Phillippe cancelled the contracts on 26th March and refused to make any further payments under the contracts. Anticipatory breach would occur when a party to the contract indicates to the other that they are repudiating the contract before performance is due. Such intimidation when clearly and unambiguously given would amount to an anticipatory breach of contract.

The point where it can be said that anticipatory breach has taken place has been clarified in the case of SK Shipping (S) Pte Ltd, where the court explained the conditions in which the innocent party to the contract can claim that there is an anticipatory breach. The court held that the innocent party can terminate the contract if it can establish that the other party demonstrated a clear and absolute intention to not perform its obligations under the contract and where the innocent party had a subjective belief that the other party will breach the contract. In such a situation, the innocent party can take steps to mitigate its losses.

In this case, Phillippe has told the other parties of his intention to not perform the contract due to the lockdown. Phillippe has therefore, repudiated the contract. In such a situation, the other parties can have the option to accept the repudiation and sue for breach of contract and mitigate; or they may refuse the repudiation and await the date of performance, in which case claims for damages or mitigation will not arise before the date of the performance, which is 30th March. There is no duty on the part of the plaintiff to mitigate damages “before there has been any breach which he has accepted as a breach”. However, once the intention to not perform the contract has been made clear by Phillippe, the duty to mitigate arises. If it is considered that Phillippe has done renunciation, then the contract can be treated as discharged by the other parties and the parties can claim damages. The party can only recover damages for loss that could not have reasonably been avoided. In other words, the other party may be under the duty to mitigate and limit damages once Phillippe makes his intention clear.

In Heyman v Darwins, the court has noted three sets of circumstances that allow right to rescind a contract: one, renunciation by a party of their liabilities under the contract; two, impossibility of performance attributed to one’s own acts; and three, failure of performance. According to this, there are two sets of circumstances in which anticipatory breach can occur, which is the first and the second above. These are the circumstances that may occur before or at the time performance is due, but in the third set of circumstances, this can occur only when the performance is due. Therefore, anticipatory breach happens when renunciation is made by one party, or when the party’s own conduct has made performance of the contract impossible.

In the current situation, the point of renunciation is relevant because the impossibility through own actions is not relevant to the situation. Renunciation was explained by the court in The Hermosa, wherein the court held that in the event of the following, it can be said that there has been a renunciation amounting to an anticipatory breach. The first is where there has been a clear case of a refusal to perform contractual obligation. The second is that the refusal is absolute and not conditional on some circumstance. The third is that a reasonable person in the position of the innocent party would regard the refusal as being clear and absolute. The fourth is that words or conduct relied on for the renunciation must be considered as at the time when it is treated as terminating the contract. The first condition in this needs more clarification with regard to the current situation. Has Phillippe refused to perform a contractual obligation or does the fact that the contract may be frustrated can be used by him to argue that there is no anticipatory breach on his part?

In this situation, Phillippe can argue that the contract is frustrated because it is impossible to perform due to the unforeseeable lockdown imposed by the government. Therefore, he can claim that he has not committed renunciation of the contract, rather, the contract is frustrated. Therefore, as per the provisions of the Law Reform Frustrated Contracts Act 1943, Section 1 (2), he is entitled to recover the advances paid by him to the three parties and the expenses incurred by the other parties are to be borne by Phillipe because. Accordingly, Galactic Fed can claim £500 for the lightening equipment already ordered and The Shire Hotels can claim £1,200 incurred on food, wine, and champagne for the ball as well as charges for the free stay for Phillipe. Phillipe is not liable to pay for the remaining amount or to pay damages.

Authorities

Attwood v Lamont [1920] 3 KB 571.

Caribonum Co Ltd v Le Couch (1913) 109 LT 587.

Commercial Plastics Ltd v Vincent [1965] 1 QB 63.

Eastes v Russ [1914] 1 Ch 468.

Fibrosa Spolka Akcyjna V Fairbairn Lawson Coobe Barbour Ltd [1943] AC 32.

Forster & Sons Ltd v Suggett, 1918) 35 TLR 87.

Gamerco Sa v Icm/Fair Warning (Agency) Ltd [1995] 1 WLR 1226.

General Bill Posting Co v Atkinson [1909] AC 118 HL.

Herbert Morris Ltd v Saxelby, [1916] 1 AC 688.

Hermosa, The [1982] 1 Lloyd's Rep. 570.

Heyman v Darwins Ltd [1942] AC 356.

Leng & Co Ltd v Andrews [1909] 1 Ch 763.

Littlewoods Organisation Ltd v Harris [1978] 1 All ER 1026.

Maritime National Fish Ltd v. Ocean Trawlers Ltd [1935] AC 524.

Mason v Provident Clothing and Supply Co Ltd [1913] AC 724.

Morgan V Manser [1947]2 All ER 266 .

Shindler v Northern Raincoat Co Ltd [1960] 1 WLR 1038, [1048].

SK Shipping (S) Pte Ltd v Petroexport Ltd, EWHC 2974 (Comm).

Walkden v Walkden [2009] EWCA Civ 627.

Books

Emir A, Selwyn's Law of Employment (Oxford University Press 2018).

Furmston M, Cheshire, Fifoot, And Furmston’s The Law of Contract (Oxford University Press 2012).