1. Table of Contents
1.0 Introduction ............................................................................................................................... 3
2.0 Restraint of trade ....................................................................................................................... 4
2.1 Definition............................................................................................................................... 4
2.2 Types of contract .................................................................................................................. 5
2.3 Contracts in restraint of trade ................................................................................................ 6
2.4 Effect of restraint covenants .................................................................................................. 7
2.5 The principles of enforcement ............................................................................................... 8
2.5.1 There must be an interest to protect................................................................................ 8
2.5.2 Employer/employee covenants trade secrets, know-how and trade connection ............. 9
2.5.3 The restraint must be reasonable .................................................................................. 12
2.6 Other interests meriting protection ...................................................................................... 14
2.7 Reasonableness .................................................................................................................... 15
2.8 Drafting of restraint covenants ............................................................................................ 16
2.10 Difficult cases .................................................................................................................... 18
2.11 Agreements between manufacturers to restrict output and fix prices ............................ 20
2.12 Exclusive dealing agreements ........................................................................................... 21
3.0 Effects of the contract being void ............................................................................................ 22
4.0 Competiton law ....................................................................................................................... 24
5.0 Antimonopoli ........................................................................................................................... 26
5.1 Definition ............................................................................................................................. 26
5.2 Importance of anititrust law................................................................................................ 26
5.3 Types of antitrust law .......................................................................................................... 26
6.0 Different perspective on restraint of trade among each country.............................................. 27
7.0 Recent Cases on Restraint of Trade in a Franchising Context ................................................ 30
7.1 General Principle ................................................................................................................. 30
7.1.2 Restraint Affecting a Franchisee Following Termination of Franchise Agreement ..... 30
7.1.3 Restraint Affecting Franchisee During Term of Franchise .......................................... 31
7.1.4 Restraint on Former Franchisee Following Sale .......................................................... 31
8.0 Restraint of Legal Proceedings ................................................................................................ 32
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2. 8.1 Definition............................................................................................................................. 32
8.2 Agreements in restraint of legal proceeding ........................................................................ 33
8.3 Contract in restraint of legal proceeding ............................................................................. 34
8.4 Effects of contracts in legal proceedings ............................................................................. 35
9.0 Conclusion ............................................................................................................................... 36
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3. 1.0 Introduction
Agreements and contracts govern almost every facet of our lives. For practical
purposes it may be said that they mean one and the same thing. However, contracts are
agreements that are legally enforceable. If they are unenforceable, they remain merely
agreements. There are three types of agreements which expressly rendered void by the
Contracts Act though not necessarily unlawful, included agreement in restraint of
marriage, agreement in restraint of trade and agreement of in restraint of legal proceeding.
In English Law, these agreements would have been classified as illegal contracts and void
under public policy while in Malaysia, the provision on restraint of trade is more
restrictive. In this assignment, we discussed and focus on the agreement in restraint of
trade and legal proceeding. These are restraints which create limitations on the rights of
one party to impose conditions, yet at the same time, allow some restrictions to be created.
These relate to marriage, trade and legal proceedings.
Generally, restraint of trade refers to activity that obstructs, limits, or eliminates
market competition. Restraints may affect particular occupations, industries, or
commercial transactions. Though it carries a presumption of illegality, a restraint of trade
may be legal or illegal, depending on its effect and intention. On the other hand,
proceedings legal is related to proceed that permits a person to enter into a lawsuit
already in progress; admission of person not an original party to the suit so that person
can protect some right or interest that is allegedly affected by the proceedings. In the
following contents will include more detail information.
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4. 2.0 Restraint of trade
2.1 Definition
Section 28 of CA:
Agreement in restraint of trade void.
Every agreement by which anyone is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void.
The law decrees that an individual, be he of any religion, cast or sect, should be liberty to
work for himself, and any agreement that deprive, aperson of the fruit of his labour, skill
or talent is void agreement. An individual can engage in any trade of his choice, an
agreement that bars him to do that goes against public policy and the law of the land. An
indiviual has the inherent right to use his labour or skill to the benefit of himself and the
society, and barring him to do that is against the interests of both.
Leather Cloth Co. vs Lorsont
Every man should be at liberty to engage himself in any trade, profession or business, and
use his resources and skill consistent with the good of the community, and is lawfully
entitled to the fruit thereof. Any agreement that bars a person to do that is void.
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5. 2.2 Types of contract
1. Vendor/purchaser covenants
The buyer of a business. For example, a shop will want an assurance that the
seller will not immediately set up in competition next door and entice back the old
customer.
2. Employer/employee covenants
An employee, on terminating his employment with a particular employer, will
agree not to work dor a completing employer nor set up a competing business.
2.2 Agreement in restraint of trade
1. Agreements in restraint of trade are contrary to the public policy and therefore
void. In Carew Co Ltd. v North Bengal etc (6 DLF Cal 75) where two sugar
manufacturers had entered into an agreement allocating zones to procure sugar for
meeting the needs of their respective factories and each of the manufacturers
under took not to draw any cane from the zones allotted to the other factory, it
was held that the agreement was in restraint to trade and therefore void.
2. In Gujarat Bottling Co Ltd v Coca Cola Company (AIR 1995 SC 2372), it has
been held that except in cases where the contract is wholly one sided, normally
the doctrine of restraint of trade is not attracted in cases where the restriction is to
operate during the period the contract is subsisting. It applies in respect of a
restriction which operates after the termination of the contract.
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6. 2.3 Contracts in restraint of trade
Three exception to the general rule are provided in section 28, namely :
Exception 1: One who sells the goodwill of a business may agree with the buyer to
refrain carrying on a similar business, within specified local limits, so long as the buyer,
or any person deriving title to the goodwill from him, carries on a like business therein:
Provided that such limits appear to the court reasonable, regard being had to the nature of
the business.
Exception 2: Partners may, upon or in anticipation of a dissolution of the
partnership ,agree that some or all of them will not carry on a business similar to that of
the partnership within such local limits as are referred to in exception 1.
Exception 3: Partners may agree that some one or all of them will not carry on any
business, other than that of the partnership, during the continuance of the partnership.
Exception 4 : Agreements between traders in the same line of business to regulate the
business or to fix prices are valid agreement. Regulations as to the opening and closing of
business in a market, licensing of traders, supervision and control of dealers and the mode
of dealing are lawful agreement even though they are in restraint of trade
Exception 5 : When a person agrees to work for another person or a firm for a salary, the
employer has the right to use the skill or experience of such person to gain a profit.
Sometime the service agreement of the employee prevents him from accepting any other
engagement during his employment. The restraint is valid
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7. 2.4 Effect of restraint covenants
1. Prima facie void
Covenants in retraint of trade are contrary to public policy and prima facie void,
unless they can be regarded as reasonable as between the parties ans as reards the
public interest
2. Burden of proof
The burden of proving that, as between the parties, the restraint is reasonable lies
on the promises; the burden of proving that as far as the public interest is
concerned, the restraint is unreasonable lies on the promisor. Reasonableness is
considered as the time of the agreement.
3. Far less formidable limits
In effect, both principles far less formidable limits on restrictive covenants, so that
most covenants were enforced, often in very wide form. In scope, the doctrine
was narrowed in the sense that the categopries of restraint of trade were taken to
be closed, so that despite the new economic institutions and arrangements that
emerged in the laissez-faire era, the doctrine was spplied only to those types of
restraint which had been common in the mercantilist.
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8. 2.5 The principles of enforcement
2.5.1 There must be an interest to protect
Common law will give the employer a degree of protection where there is no covenant:
i. Using or disclossing trade secret
ii. Soliciting the employer‟s customers
iii. Using or disclosing confidential information
Forster v Suggett (1918) 35 TLR 87
D was employed as the works manager of the P's glass works. He agreed that for five
years after termination of employment with P, he would not divulge any secret
manufacturing process learnt during employment, nor would he work in the glass
industry in the UIC. It was held that the restraint was reasonable to protect P's legitimate
interest and was enforceable.
Herbert Morris Ltd v Saxelby [1916] 1 AC 688
The respondent was employed by the appellants as a draftsman in their business of
manufacturing lifting machinery. The company had its head office in Loughborough and
branches in eight large cities. The contract of employment contained a clause that for
seven years after leaving he would not become engaged anywhere in the UK in any
similar business. The House of Lords held that the clause was wider than reasonably
necessary to protect the appellant's interest – the appellants were merely trying to reduce
competition.
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9. 2.5.2 Employer/employee covenants trade secrets, know-how and trade connection
1. Trade secrets
Trade secrets include secret formulae, processes and confidential information (but
excluding information which is confidential only in the sense that during
employment the employee must not reveal it.
Faccenda Chicken v Fowler [1986] ICR 297
The plaintiffs owned a number of refrigerated vans and operated a mobile service selling
frozen chickens to retail shops and catering companies. Fowler, an ex-employee set up in
competition with his previous employers and they attempted to prevent him from doing
so by raising an action for breach of confidence. The plaintiffs alleged that Fowler was
using confidential information in breach of his obligation of confidence by using his
knowledge of sales information and customer lists to compete with them. Goulding J held
that information acquire by an employee during the course of employment could be
divided into three categories -
i. Information either trivial in nature or available from public sources which could
not be regarded as confidential.
ii. Information which an employee must treat as confidential either because this is
expressly communicated to him or because the information is obviously
confidential in nature.
iii. Specific trade secrets so confidential that they cannot lawfully used for anyone's
benefit except the original employer notwithstanding that the employee may have
learned this information by heart.
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10. 2. Know-how
Know-how is conseidered as not within legal protection, given commercial
application and potential is likely to be protected.
Pearson LJ in Commercial Plastics vs Vincent[1965] 1 QB 623
Pearson LJ said when construing the restraint "although the time for ascertaining the
competitors is the time of termination of a contract of employment, the time for
ascertaining the reasonableness of a restrictive covenant or provision is the time of the
making of the contract". This highlights one of the problems of the approach that the time
at which reasonableness should be considered is the time of contract. Many restraints, as
in Commercial Plastics, refer to the fact that a party may not solicit or compete with the
other party in relation to those who were customers at the date of the determination of the
contract. One therefore has the dichotomy of examining what is reasonable at one time
(ie the start of the contract), whilst also examining the ultimate purpose of the restraint at
another (ie the end of the contractual period).
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11. 3. Trade connection
An employer is entitled only to protection in cases where the employee was likely
to have come into contact with clients or customers and to have acquired
influence over them.
A solicitor's clerk – Fitch v Dewes [1921] 2 AC 15
A restraint against an employee who had had no contact with the employer's clients
would not be upheld.
An assistant solicitor had already worked for his employer in humbler status for many
years when, aged 27, he signed a covenant restricting his acting in competition with his
employer within seven miles of Tamworth Town Hall for an unlimited time. He
complained of the temporal restriction. Held: "What are the facts here? A boy of the age
of 14 is taken from a humble employment in the office of the local co-operative society
and he is trained in the office of a solicitor of position in this particular neighbourhood.
It is in the public interest that a proper restrictive agreement of this kind between an
established solicitor, possibly an elderly man, and a younger man should be allowed. It is
in the public interest because otherwise solicitors carrying on their business without a
partner would be extremely chary of admitting competent young men to their offices and
to the confidential knowledge to be derived by frequenting those offices."
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12. 2.5.3 The restraint must be reasonable
The Court will only enforce restraint covenants which go no further than is reasonably
necessary to protect the employer's interest. The Court will not uphold a covenant which
seeks to protect employer's activities which the employee was not involved in. A
covenant in a tailor's service agreement against working as a hatter was struck down as
unreasonable.
Attwood v Lamont [1920] 3 KB 571
A restrictive covenant was imposed on a former employee of a tailor, which prevented
him working as a tailor, dressmaker, general draper, milliner, hatter, haberdasher,
gentlemen‟s, ladies‟s or children‟s outfitter within 10 miles of his former employer‟s
shop. The geographical are was reasonable but the scope restriction was not, because it
went beyond working as tailor to include other businesses that did not compete with the
former employer‟s business.
a. Area of restraint
To some extent an employer may actually protect himself against competition
from an employee because the law allows a restraint preventing an employee from
setting up in business – to prevent exploitation of trade secrets or trade connection
– within a given (reasonable) area for a given (reasonable) time. An area restraint
will be struck down as void if it covers an area wider than is necessary for the
protection of the employer's interest.
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13. Mason v Provident Clothing & Supply Co Ltd [1913] AC 724
A restriction on a canvasser was held void as the area of restraint (25 miles of London)
was one thousand times larger than the area of employment.
Fitch v Dewes [1920] 2 Ch 159
A life-long restraint on a solicitor's managing clerk not to work within seven miles of
Tamworth was held to be reasonable in the circumstances.
b. Duration of the restraint
The Court will consider the nature of the business to be protected when
determining reasonableness as to duration.
Fitch v Dewes [1920] 2 Ch 159
A life-long restraint on a solicitor's managing clerk not to work within seven miles of
Tamworth was held to be reasonable because the clients of the firm would have been
likely to have wanted to deal with the former managing clerk for a very long time.
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14. 2.6 Other interests meriting protection
New interests are „commercial‟ interests and that an expressly drawn covenant would be
needed to protect them whereas, at common law, the other interests, to a limited extent,
are protected in the absence of a covenant.
Greig vs Insole [ 1978 ] 1 WLR 302
A case arising out of the Packer cricket affair, when Packer established a rival set of
teams to games to international test cricket, and poached players. It was held that the
governing bodies of cricket had a legitimate interest in the administration of the game to
justify the imposition of reasonable restraints on the players. However it was also held
that the bans in question, preventing players who had joined the Packer organization from
playing in test and county cricket, were too wide. In this case, however, it should be
noted that there was no contract between the governing body and the players.
Esso Petroleum Co Ltd v Harper‟s Garage ( Stourport ) Ltd [ 1968 ] AC 269
A solus tie seeks to limit the mortgagor‟s choice of commercial supplier by incorporating
a provision into the mortgage deed that determines the source from which the mortgagor
may obtain his supplies during a predetermined period. Solus ties and other restraint of
trade clauses can be found in contracts other than mortgage contracts: the principles that
underpin the law‟s dislike of such clauses, which are held to impose an unreasonable
restraint on the borrower, are of general application and do not originate from the law of
mortgages.
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15. 2.7 Reasonableness
Agreements between an employer and an employee will be held unreasonable as regards
the public interest.
Wyatt v Kreglinger and Fernau [ 1933 ] 1 KB 793
An employee ( a wool worker ) was promised a pension on his retirement and it was
agreed that he would not receive the pension if he competed against his employers in the
wool trade. The Court of Appeal held the transaction void-it was contrary to the public
interest to deprive the community of a valuable skill.
The Court will examine the relative strength of the bargaining position of the parties. The
Court will be particularly concerned to ensure that the dominant party does not take
advantage of the weaker party
Public interest is almost impossible to define. It is unlikely that a particular restraint will
be struck down simply because some broad economic interest .will be effected. Precision
of drafting will be required. The public interest is likely to focus on the freedom of the
individual to wok with restriction
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16. 2.8 Drafting of restraint covenants
All restrictions on employees can be included within restraint of trade clauses of their
employment agreements. It is of crucial importance to ensure that the restraint clause is
not drafted to widely. As will be seen, the Court has power to strike out offending clauses
and leave valid clauses intact provided the clause or contract as a whole when then
construed makes sense. The Court does not have power to add to or vary or re-write a
clause. The danger of a valid provision being failing because a part of the same clause is
struck down as void is ever present. However, if the restraints are required in order to
provide protection of the parties concerned which is reasonably necessary, then, despite
being against public policy, the restraints are valid.
Behaviours of ex-employees that can be restrained include:
The use of confidential information obtained during employment.
The unauthorized use of the employer‟s property following termination of
employment.
The solicitation of clients, suppliers and other employees from their former
employer.
The right to compete with their former employer.
Commercial Plastics vs Vincent (1965)
In that case, it was held that a “home-made” covenant which prevented the employee
from “seeking employment with any of our competitors in the PVC calendaring field”
was unenforceable because Commercial Plastics‟ activities were confined to the UK.
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17. 2.9 Agreements between the buyer and seller of a busniness
Restraints imposed on the seller of a business to restrict competition are more readily
upheld than restraints on employees but are generally subject to the same principles.
In particular, there must be a proprietary interest meriting protection, and so:
i. Only the actual business sold is entitled to protection.
ii. A restriction which purports to restrain a business not actually carried on will be
void-Vancouver Malt and Sake Co Ltd vs Vancouver Breweries Ltd (1934) AC
181.
iii. Area covenants in vendor/ purchaser cases are readily enforced even if the area is
worldwide as in the Nordenfelt case.
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18. 2.10 Difficult cases
The distinction between employer/employee and vendor/purchaser contracts is by no
means exhaustive. A covenant by a retiring doctor or solicitor would not fall into either
category Bridge v Deacons [1984] AC 705 and asserts that the Courts will not subject
such covenants to the strict employer/employee rules.
Bridege vs Deacons[1984] AC 705
Deacons is a firm of solicitors in Hong Kong. Bridge was an equity partner with a 5 per
cent share. The partnership agreement provided that, for a period of five years, no retiring
partner could act as a solicitor in Hong Kong for any entity which at the date of
retirement, or during the previous three years, was a client of the firm. Bridge retired and
transferred his share in the business to the continuing partners. Shortly thereafter the
continuing partners issued proceedings against Bridge seeking an injunction enforcing the
restrictive covenant.
Bridge claimed the restrictive covenant was unenforceable because it was excessive,
arguing among other things that he had no contact with 90 per cent of the clients. The
judicial committee of the Privy Council disagreed and identified a number of factors
relevant to enforceability, including:
partners were the owners of all the firm's assets, including goodwill;
Transferred his share of those assets to the continuing partners when he retired
The covenant applied equally to all partners and this mutuality was a most
important consideration in assessing whether it was reasonable.
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19. It is clear that the courts are more inclined to hold restrictive covenants between partners
as enforceable than covenants sought to be enforced by an employer against an employee.
Between employer and employee, only restrictions much more limited than that in Bridge
v Deacons are normally enforceable.
Treitel then gives the illustration of the man who sells his business to a company and then
becomes managing director of the company working under a covenant. Treitel suggests
that this type of case would be treated in the same more generous manner as
vendor/purchaser covenants.
A Schroeder Music Publishing Co v Macauley [1974] 1 WLR 1308
The House of Lords upheld the decision of the judge at first instance who had held a
contract between a songwriter and a music publishing company for an initial period of
five years, to be against public policy as being in restraint of trade, and thus void. Soon
after, in Clifford Davis Management Ltd v WEA Records Ltd [1975] 1 All ER 237;
[1975] 1 WLR 61, the Court of Appeal held that the two contracts entered into between
the two members of the pop group, Fleetwood Mac, with a publishing company, whereby
they undertook to grant the publishing company the worldwide copyright in all the works
composed by them over a period of ten years, were made between parties with unequal
bargaining power, and therefore ought to be set aside.
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20. 2.11 Agreements between manufacturers to restrict output and fix prices
Such agreements are prima facie void at common law but the courts have been prepared
to uphold where reasonable, for example, to avoid a glut on the market.
Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1919] 1 KB 418
Two manufacturers agreed not to employ each others employees for five years after they
left their original employer. The Court of Appeal held that the contract was void as it
covered all employees whether they knew trade secrets or not and that it was of excessive
duration.
In fact such agreements are now almost entirely subject to statutory control under the
Restrictive Trade Practices Act 1976 that is UK legislation which governs trading
agreements which may be seen as restricting free competition in a way which is contrary
to the public interest.
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21. 2.12 Exclusive dealing agreements
If a trader, when purchasing or leasing new premises, covenants with the vendor or lessor
(in the conveyance or lease) to buy only the latter's products, and then goes into
possession, the exclusive dealing tie is outside the restraint of trade doctrine.
Lobb (Garages) Ltd v Total Oil Ltd [1985] 1 WLR 173
The plaintiffs, whilst in financial difficulties, leased their garage to the defendant oil
company for 51 years at a premium of £35,000. The defendants sub-leased it back to the
plaintiffs for 21 years at an annual rent of £2,500, with a mutual right to break at 7 or 14
years. The sublease contained a solus tie whereby the plaintiffs agreed to sell only the
defendants' petrol. The Court of Appeal held that the lease and lease-back were subject to
the restraint of trade doctrine but the tie was valid as being reasonable in the
circumstances. The principal purpose of the agreement was as a financial rescue
operation from which the plaintiffs benefited as they received ample consideration
(£35,000) for the lease and they were free to exercise the break clause after 7 or 14 years.
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22. 3.0 Effects of the contract being void
1. The contract is void insofar as it contravenes public policy
Walls v Day (1837) 3 B & A 113
A contract of employment contained a provision which was alleged to be a void restraint
of trade. This did not prevent the plaintiff being able to recover arrears of salary. It
follows from this that subsequent or collateral transactions are not necessarily void
unless they relate solely to that part of the original transaction that is itself void.
2. Money paid or property transferred is recoverable
Herman v Charlesworth (1905) 2 KB 123
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23. 3. Severance
Severance is the power of the court to remove a void provision in a contract and
enforce the remainder. The power exists in the case of void contracts and there is
authority that an illegal contracts may be subjected to severance.
Goldsoll v Goldman (1915) 1 Ch 292
D sold a jewellery business to the plaintiff, D covenanting that he would not deal in real
or imitation jewellery in the United Kingdom or in other specified foreign places. The
restraint as to the latter was too wide in the circumstances, as was the reference to real
jewellery since the business dealt only in imitation jewellery in the United Kingdom. The
void restrictions were severed leaving a valid contract in restraint of trade.
Contrast: Attwood v Lamont [1920] 3 KB 571
D was employed as a tailoring cutter for the plaintiff, a general outfitter. The defendant
covenanted not to subsequently engage in a number of trades carried on by the plaintiff's
business, including tailor, milliner, draper, hatter and haberdasher within a ten mile radius.
The court refused to sever so as to leave the tailoring restriction valid; the covenant
formed a single indivisible covenant for the protection of the plaintiff's entire business. It
was not a series of covenants for the protection of each department of the plaintiff's
business. The whole covenant was therefore void.
It should further be noted that the court will not re-draft the covenant in any way, thus
applying the so-called “blue pencil test”. The court will merely strike out the offending
words; what is left must make sense without further additions.
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24. 4.0 Competiton law
Many contracts between businesses which restrain trade will fall foul of the Competition
Act 1998, or the EU level, of EU competition law, except where the relevant competition
authorities have permitted exceptions to the rules against anti- competitive practices.
United States vs. Microsoft
A set of consolidated civil actions filed against Microsoft Corporation pursuant to
the Sherman Antitrust Act on May 18, 1998 by the United States Department of
Justice (DOJ) and 20 U.S. states. Joel I. Klein was the lead prosecutor. The plaintiffs
alleged that Microsoft abused monopoly power on Intel-based personal computers in its
handling of operating system sales and web browser sales. The issue central to the case
was whether Microsoft was allowed to bundle its flagship Internet Explorer (IE) web
browser software with its Microsoft Windowsoperating system. Bundling them together
is alleged to have been responsible for Microsoft's victory in the browser wars as every
Windows user had a copy of Internet Explorer. It was further alleged that this restricted
the market for competing web browsers (such as Netscape Navigator or Opera) that were
slow to download over a modem or had to be purchased at a store. Underlying these
disputes were questions over whether Microsoft altered or manipulated its application
programming interfaces (APIs) to favor Internet Explorer over third party web browsers,
Microsoft's conduct in forming restrictive licensing agreements with original equipment
manufacturer (OEMs), and Microsoft's intent in its course of conduct.
Microsoft stated that the merging of Microsoft Windows and Internet Explorer was the
result of innovation and competition, that the two were now the same product and were
inextricably linked together and that consumers were now getting all the benefits of IE
24

25. for free. Those who opposed Microsoft's position countered that the browser was still a
distinct and separate product which did not need to be tied to the operating system, since
a separate version of Internet Explorer was available for Mac OS. They also asserted that
IE was not really free because its development and marketing costs may have kept the
price of Windows higher than it might otherwise have been. The case was tried before
Judge Thomas Penfield Jackson in the United States District Court for the District of
Columbia. The DOJ was initially represented by David Boies.
FTC vs Morton Salt
The Supreme Court held that the existence of a substantial price difference over a
substantial period of time involving a product for resale, where competition among
resellers is “keen”, creates an inference to competition. Cases inferring competitive injury
from price discrimination frequently involve entrenched discriminatory pricing between
highly competitive customers operating with low profit margins. No inference of injury
of competition is permitted when the discrimination is not substantial.
Injury to competition can be proved through direct evidence of lost sales or profits caused
by discrimination. The more common approach is to prove the requisite competitive
injury by inference.
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26. 5.0 Antimonopoli
5.1 Definition
Antimonopoly is a law and regulations known as antitrust law which designed to protect
trade and commerce from unfair business practices.
5.2 Importance of anititrust law
It allows government to prevent mergers
It allows government to break up companies
It prevents companies from performing activities that make markets less
competitive
5.3 Types of antitrust law
i. Sherman Antitrust Act 1890
US Federal Governement to investigate and pursue trusts, companies, and
organizations suspected of violating the Act. Simultaneously it reduced the
market power of the large and powerful “trusts” of that period.
ii. Clayton Antitrust Act 1914
The government‟s sole in regulating business and helped to set the foundation for
most of the regulation of business competition today. Simultaneously it
strengthened the government‟s poers and authorized private lawsuits.
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27. 6.0 Different perspective on restraint of trade among each country
6.1 Malaysia – Wrigglesworth vs Wilson Anthony
An agreement was entered into between the plaintif and the defendant whereby the latter
was restrainted from practising as an advocate and solicitor within 5 miles from Kota
Bharu town for a period of 2 years after the termination of his service agreement with his
employer. The defendant left the employment and set up a practice in Kota Bharu town in
contravention of this agreement. The plaintif claimed an injunction to restrain the
defendant from practising as an advocate and socilitor in accordance with the agreement.
This restraint was held void by the judge.
6.1.1 Singapore – Chan Sek Keong in Asia Polyurethane vs Woon Sow Liong(supra)
He said that the employer in that case had no interest, like trade secrets or confidential
information relating to customers, which required protection. It was, therefore, contrary
to public policy to restrain competition by the employee in that case. The employers
deposed in an affidavit that '… a competent chemist may be able to analyse the chemical
composition and the percentages of the chemicals therein …'. This admission drove His
Honour to conclude as he did. So, public policy favours the protection of trade secrets,
confidential information and the like. If the restraint of trade covenant encompasses such
matters, the courts will, as a matter of public policy, afford protection to the employer,
provided that there is sufficient evidence to establish them.
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28. 6.1.2 India – Madhav Chandra vs Raj Coomar Dass
In this case, A and B were carrying on a similar trade in the same locality in Calcutta. A
promised B that he would stop trading in the locality if B gave him a certain amount of
money which he had advanced to his workers. Subsequent to A‟s closing the business, B
refused to pat what he had promised and A filled a suit for the recovery of the amount.
The court hed the agreement void under Section 27 of the Act.
6.1.3 United States - American Cyanamid Ltd v Ethicon Ltd [1975] AC 396, HL.
This remedy will stop Tina from acting in breach of the covenants. It cannot prevent Tina
from working for Motors after the six-month period has elapsed or from using non-
confidential material. The basic rule is that the claimants must have an arguable case,
which apparently Karsales do. The merits (such as the reasonableness of the covenant)
are not considered.
6.1.4 Common law – Nodenfelt vs Maxim Nordenfelt Guns and Ammunition Co[1894]
AC 535
The owner of an armaments business who sold it was held to a covenant applicable for 25
years anywhere in the world.
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29. In comparison, Indian law stipulates all agreement that restrain trade to be void. The
qualification „to that extent void‟ in Section 27 specifies that if an agreement can be split
into two parts, and one part does not violate this condition, then the part that does not
violate the basic law of public policy would be valid and the other part would be void. If
the agreement cannot be split as such, the whole agreement is void.
Under English law, the agreement would have been valid since it was in the interest of
both parties, but it was a void agreement under section 27 in India.
Whereas come to common law, all covenants in restraint of trade are prima facie void and
unforceable if they are shown to be reasonable as between the parties and to be in the
public interest.
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30. 7.0 Recent Cases on Restraint of Trade in a Franchising Context
7.1 General Principle
The starting point is that restraints are contrary to public policy and, therefore, void
unless in the special circumstances of the particular case:
1. The restraint is reasonable as between the parties.
2. The restraint is reasonable having regard to the public interest in competition.
The assessment of these two tests of reasonableness is made against the facts and
circumstances at the time the agreement was made not at the time the agreement is
sought to be enforced or damages claimed for breach.
7.1.2 Restraint Affecting a Franchisee Following Termination of Franchise Agreement
Raine & Horne Pty Ltd vs Adacol Pty Ltd [2006] NSWSC 36
The court found that a franchisor has the following interests to be protected by a restraint
of trade:
1. Its direct interest in receiving franchise fees under the franchise agreement. In
this case, Adacol proposed to continue to pay the franchise fees until the end of
the term so to that extent this interest was addressed, or not at risk.
2. An interest in the franchise itself over and above the revenue it derives from
it. For example, if the franchise comes to an end by effluxion of time, it is open
to Raine & Horne to enter into a new franchise agreement with another franchisee
to establish what would be in substance a takeover of the existing Raine & Horne
business, without competition from the former franchisee. This is something
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31. quite significantly different to building up a new franchise business in the teeth of
competition from the existing franchisee in the very location. Support for this
interest was found in the assignment provisions of the franchise agreement, which
provide for the franchisee to be restrained from competing with the purchaser (in
addition to any restraint the purchaser negotiates with the former franchisee).
7.1.3 Restraint Affecting Franchisee During Term of Franchise
Master Class Enterprises Pty Limited vs Bedshed Franchisors (WA) Pty Limited [2008]
WASC 67
The court looked at the recitals to the franchise agreement and a number of other clauses
in both the franchise agreement and the operations manual and came to the conclusion
that the purpose of clause 6.2 was to ensure that the person responsible for the day-to-day
conduct had a substantial interest in the business (as owner or guarantor) and to enhance
the effective management of the business as opposed to it having the intention or the
effect of a restraint of trade.
7.1.4 Restraint on Former Franchisee Following Sale
Allegra of North America Inc vs Stevens [2008] BCSC 1220 – Canadian Case
The Court looked at the offering memorandum (disclosure document), the recitals to and
other provisions of the franchise agreement, the operations manual and other IP of the
franchisor, to assess the extent to which the franchisor had a legitimate business interest
to protect and whether the restrictive covenant was reasonable.
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32. 8.0 Restraint of Legal Proceedings
8.1 Definition
Section 29 of CA:
Agreement in restraint of legal proceeding.
Every aggreements, by which any party there to is restricted absolutely
from enforcing his rights under or in respect of any contract, by the usual
legal proceedings in the ordinary Tribunals, or which limits the time
within which he may may thus enforce his right is void to that extent.
Legal proceeding means action or procedure instituted in a court of law to acquire benefit,
interest, or right or to enforce a remedy. Section 28 declares the agreements void:
i. An agreement by which a party is restrained absolutely from taking usual legal
proceeding, in respect of any rights arising from a contract.
ii. An agreement which limits the time within which one may enforce his contract
rights,without to the time allowed by the limitation act.
Baroda spinning Ltd. Vs Satyanarayan Marine and Fire Ins. Com. Ltd
In a contract of fire insurance, it was provided that if a claim is rejected and a suit is not
filed within three months after such rejection, all benefits under the policy shall be
forfeited. The provision was held valid and binding and the suit filed after three months
was dismissed.
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33. 8.2 Agreements in restraint of legal proceeding
1. Restrains a party, wholly or partially, from enforcing his rights under or in respect
of a contract. In Chai Sau Yin vs Liew Kwee Sam, the case involved the sale of
rubber by respondent, Liew Kwee Sam, to a partnership of which the appellant
was a member. Under the Rubber Supervision Enactment, the purchaser must
have a licence and in this instance, it was held by only one of the partners. When
the respondent claimed for the balance of the price of rubber sold, the appellant
pleaded that the licence was personal to his partner and did not cover the
partnership. As a result, any purchase by the appellant was prohibited by the
enactment and illegal.
2. Curtails the period of limitation prescribed by law with the object of defeating the
provisions of law. In G.H.Joshi v United Indian Association, the plaintiff was a
member of the defendant association which had a rule stating that no member
should have recourse to the court in matters concerning the association. The
plaintiff required the committee of association to furnish him with information
concerning what appeared to be irregularities in administration. He failed to get
satisfaction. Then he sought the assistance of the court when threatened with
expulsion. The court held that even though there was provision in the rules
prohibiting an appeal to courts of law, if an action was indispensable, the
jurisdiction of the courts could not be ousted by the rules because justice could
not be carried out without jurisdiction.
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34. 8.3 Contract in restraint of legal proceeding
Exception 1: This section shall not render illegal a contract by which two or more persons
agree that any dispute which may arise between them in respect of any subject or class of
subjects shall be referred to arbitration, and that only the amount awarded in the
arbitration shall be recoverable in respect of the dispute so referred.
Exception 2: Nor shall this section render illegal any contract in writing, by which two or
more persons agree to refer to arbitration any question between them which has already
arisen, or affect any law as to references to arbitration.
Exception 3: Nor shall this section render illegal any contract in writing between the
Government and any person with respect to an award of a scholarship by the Government
wherein it is provided that the discretion exercised by the Government under that contract
shall be final and conclusive and shall not be questioned by any court.
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35. 8.4 Effects of contracts in legal proceedings
Under section 28 and 29, the whole contract is not void. It is void to the extent of the
restraint only. In other words, it may be possible to sever that part which is valid and to
enforce the rest of the agreement provided it does not substantially alter the nature of the
agreement. For example:
Faccenda Chicken Ltd carry on the business of breeding, rearing, slaughtering and selling
chickens. The chickens are sold as fresh chickens which means that, though after being
slaughtered they are chilled in refrigerators until sale, they are not actually frozen. At all
material times Mr Robin Michael Faccenda has been the chairman and managing director
of Faccenda Chicken Ltd. In about 1973 Faccenda Chicken Ltd engaged Mr Barry
Fowler as sales manager.
In these proceedings two alleged causes of action were relied on:
i. breaches of implied terms of the contracts of employment that the nine employees
would faithfully serve Faccenda Chicken Ltd and „would not use confidential
information and/or trade secrets gained by them and each of them whilst in
[Faccenda Chicken Ltd‟s] employment to the disadvantage or detriment of
[Faccenda Chicken Ltd], whether during the currency of such employment or
after its cessation …‟
ii. an unlawful conspiracy „together to injure [Faccenda Chicken Ltd‟s] goodwill and
connection by unlawfully making use of the said confidential information and/or
trade secrets of [Faccenda Chicken Ltd] gained by the individual Defendants
whilst in [Faccenda Chicken Ltd‟s] employment …‟
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36. 9.0 Conclusion
Upon complete this project, we get to more understand about agreement in
restraint of trade and legal proceeding which include from the basic definition of those
agreement, effect of restraint covenants, the three important conditions in agreement of
restraint of trade which including interest to protect, restraint must reasonable and not
contrary to the public interest, the effects of legal proceeding, competition law and anti
monopoly. Through the information we found, we can concluded that the use of restraint
of trade agreements and legal proceeding are important in many aspects especially in
employment contracts is widespread but still remain controversial. The reason for the
debate is that the restraint agreement involves two different and key legal principles. A
restraint of trade of agreement restricts or limits that freedom by preventing the employee
to practice a trade in a particular industry and usually within a specified geographical area.
Besides, difference type of law such as UK English law, Indian law and common
law will produce difference type of judgement result. Therefore, we need to be alert with
the surrounding happened on us as it might affects us in everywhere.
Lastly, we would like to thanks to our lecturer who gives us this chance to have
discussion and research about agreement in restraint of trade and legal proceeding. For
those information and knowledge that we had learn can improve us and be utililized
maximum in our daily life. We also had learning to do a job by work together of all the
group members
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37. Bibliography
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38. Restrictive Agreements. (n.d.). Retrieved from
http://www.capdm.com/demos/gi/gi/GL0308.html
Sherman Antitrust Act. (n.d.). Retrieved from
http://en.wikipedia.org/wikisherman_antitrust_act
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Books(Asia) LTD.
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39. GLUL 2023 BUSINESS LAW
RESEARCH PAPER – RESTRAINT OF TRADE AND LEGAL PROCEEDING
GROUP D
PREPARED FOR :
EN. AHMAD MOHSEIN BIN AZMI
PREPARED BY :
NAME MATRIC NO
AZIZAH BINTI AMIRUDDIN 195495
NUR ALWANIS BINTI ROZI 195506
LEE CHOOI PING 195562
LEE SHU TING 206654
GAN POH YEN 206671
LOW SWEE KWANG 206812
KHOR JIEN HONG 206934
TEH SIOK ERN 207082
ANG MEOW NING 207174
TAN QIU YUN 207221
SUBMISSION DATE : 15 APRIL 2011
39