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31 Cards in this Set
- Front
- Back
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Void Contracts - Introduction
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There are certain types of contract that will be deemed void on the basis that they are contrary to public policy. In terms of effect, there are few differences between illegal contracts and those declared void on the grounds of public policy.
One distinction that does apply, however, is that severance will generally be available in the case of void contracts, but is not available in the case of illegal contracts. The rationale is that illegal contracts taint or infect the entire contract, so much so that no part of the contract can be saved. The distinction has been described by Somervell L.J. in Goodison v Goodison [1954] 2 QB 118 as follows: [T]here are two kinds of illegality of differing effect. The first is where the illegality is criminal ... and in those cases ... such a provision, if an ingredient in a contract, will invalidate the whole, although there may be many provisions in it. There is a second kind of illegality which has no such taint; the other terms in the contract stand if the illegal portion can be severed. There are three kinds of contract that fall within in this category: (1) Contracts ousting the jurisdiction of the courts. (2) Contracts that subvert the sanctity of marriage. (3) Contracts in restraint of trade . |
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Contracts ousting the jurisdiction of the courts.
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Contracts that attempt to exclude the jurisdiction of the courts or attempt to refer disputes to a pnvate forum with no nght of appeal are void.
In the words of Romer L.J. in Lee v Showman's Guild of GB [1952) 2 QB 329: The proper tribunals for the determination of legal disputes in this country are the courts, and they are the only tribunals which, by training and experience, and assisted by properly qualified advocates, are fitted for the task. The courts jealously uphold and safeguard the prima facie privilege of every man to resort to them for the determination of enforcement of his legal rights. |
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Scott v Avery (1856) 5 HL Cas 811
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It was held that a contract that provided that the parties would have no cause of action until
arbitrators had made a decision on any dispute between the parties was found to be valid. |
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Winterhur Swiss Insurance Co v JCI [1990] ILRM 159.
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Notwithstanding this decision, the court still retains the discretion to hold a court hearing on the matter if It feels that would be more appropriate.
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Contracts that subvert the sanctity of marriage.
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~ue to the constitutional guarantees associated with marriage, any contract that can be
mterpreted as u~d~rrrlining the marriage contract will be deemed void. Thus pre-nuptial a~eem~nts provtdmg .for how the assets of the marriage are to be divided upon the dtssolutwn of t~e marnage are treated as void; by preparing for the marriage break-up at the outset of the umon, these contracts are essentially undermining the entire institution. |
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Marquess of Westmeath v Marquess of Salisbury (1930) 5 Bli (ns) 339
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The court held that an agreement to pay maintenance in the event that the parties should separate was unenforceable.
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MacMahon v MacMahon [1913] l IR 428
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The parties had already separated when they decided to resume cohabiting again. They entered into a contract that provided for dealing wtth matters between them should the relationship come to an end. It was held that this agreement was not void because it actually encouraged the parties to get back together and was therefore promotmg the sanctity of marriage:
The object of the deed was to bring about a reconciliation, and it was only to become operative if and when such reconciliation took place. The result was the parties contemplated. So far from endangering the unity of the family, it restored it, and they were together for many years. To hold that a contract which was intended to bring, and did in fact bnng, this about, was opposed to public policy, would seem grotesque to my mind. |
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Ennis v Butterly [1996] IR 426
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A man and woman began co-habiting. Each had been married before. The plaintiff alleged that the defendant had promised to marry her. He
apparently bought her an "engagement ring". When the relationship ended, the plaintiff attempted to enforce the cohabitation agreement. The court held that the contract could not be enforced because tt would give such agreements a similar status in law as a marital contract. The court noted that such an agreement was contrary to public policy as it was one "the consideration for which is wifely services rendered on the part of a mistress" . |
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Contracts in restraint of trade
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Contracts/clauses in restraint of trade are treated with a great deal of scepticism by the courts.
Thus all contracts in restraint of trade are prima facie void. Public policy would insist that the employee's right to trade or to set up in competition should not be interfered with unduly. On the other hand, an employer is entitled to act in a reasonable manner to protect his business and if the contract is deemed necessary to protect the business, it may be enforceable against the employee. Such contracts/clauses usually provide that the employee cannot work in the same business for a period of years or within a number of miles of the employer after leaving his employment. These clauses are used primarily where the employee gains access- through his work- to sensitive information that could be used to take business from the employer, e.g. client lists, trade secrets, etc. Such clauses have been upheld in cases involving a solicitor's clerk (Fitch v Dewes [1921] 2 AC 158) and a stockbroker's clerk (Lyddon v Thomas ( 1901) 17 TLR 450), but not in the case of a bookmaker's assistant who had no personal relationship with the customers (SW Strange Ltd v Mann [1965] 1 AllER 1069). |
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Esso Petroleum Co Ltd v Harper's Garage Ltd [1968] AC 269.
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In that case, the respondent entered into a contract with Esso whereby it agreed to buy all its fuel requirements from Esso and to operate the garage in line with Esso company policy. The respondent was entitled to discounts on fuel purchased, etc. The agreement was to last for 21 years; in the case of other garages it was five years.
This agreement was mortgaged to Esso, which was to be repaid by instalments over that time. The House of Lords took the opportunity to examine the law on restraint of trade. In particular, it made the following points: ( 1) the agreement should not go any further than is necessary to protect the party; (2) was the agreement reasonable as regards the party restrained? (3) was the agreement reasonable as regards the public interest? The House of Lords found that such agreements (solus agreements, as they were known) were justifiable if limited to a reasonable time-frame. Thus the agreement that extended for five years was acceptable, whereas the agreement that extended for 21 years was not. |
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Faccenda Chicken v Fowler
[1985] ICR 589 |
Information on pricing policies, delivery routes and customer lists were not found to be deserving of protection as they were not considered to be trade secrets.
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John Orr Ltd v John Orr [1987] ILRM 702
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In that case, the defendant sold his business in Ireland to one of the plaintiffs. He remained as a director of the company and entered into an arrangement whereby he agreed not to work for, or have an interest in, any company that manufactured competing products.
He also agreed not to solicit any customers from the plaintiff. This agreement would apply for up to one year from the date of the sale of the company. The defendant set up a competing company in England, unbeknownst to the plaintiffs. It was held that the non-solicit clause was enforceable as it protected a legitimate proprietary interest and was limited in time. The other parts of the clause (not to manufacture competing products or to work for a competitor) were not valid. Those clauses had a worldwide effect when the company had not traded in the UK. These clauses were considered excessive. The offending clauses were severed from the contract and the remaining clause was binding. Costello J. set out the law as follows: The principles of law to be applied in the issue are not in controversy and can be briefly stated. All restraints of trade in the absence of special justifying circumstances are contrary to public policy and are therefore void. A restraint may be justified if it is reasonable in the interests of the contracting parties and in the interests of the public. The onus of showing that a restraint is reasonable between the parties rests on the person alleging that it is so. Greater freedom of contract is allowable in a covenant entered into between the buyer and seller of a business than in the case of one entered into between an employer and employee. A covenant against competition entered into by the seller of a business which is reasonably necessary to protect the business sold is valid and enforceable. A covenant by an employee not to compete may also be valid and enforceable if it is reasonably necessary to protect some proprietary interest of the covenantee such as may exist in a trade connection of trade secrets. The courts may in certain circumstances enforce a covenant in restraint of trade even though taken as a whole the covenant exceeds what is reasonable, by the severance of the void parts from the valid parts. The court also noted that greater flexibility will be shown regarding the enforcement of such clauses where it involves the sale of a business rather than between an employer and an employee. The rationale would appear to be that in the former situation, freedom of contract applies because the parties are usually in an equal bargaining position. Two main points can be taken from this quotation. First, the clause must do more than is necessary to protect the legitimate interest of the employer. Secondly, the clause must be reasonable in the circumstances. |
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Vancouver Malt and Sake Brewing Company v Vancouver Breweries Ltd [1936] AC 181
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A clause contained in the assignment of a lease providing that the assignor could not brew beer for 15 years was unenforceable because the assignee did not brew beer and had no interest requiring protection in those
circumstances. Thus in contracts involving the sale of a business, the buyer may insist on a clause restraining the seller from setting up in direct competition- the seller has a legitimate interest in the goodwill of the business, which he can try to protect. |
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Forster & Sons Ltd v Suggett (1918) 35 TLR 87
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A manager worked in a glass bottle factory and was prohibited under a restraint of trade clause from working in the industry in the UK for the five years following his departure from the company. This clause was upheld by the court on the basis that during his time as an employee, the manager had gained access to confidential information relating to the manufacture of glass bottles (which was quite specialised).
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Marshall (Thomas)( Exports) Ltd v Guinle [1979] Ch 227
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Stated that three factors must be identified by the court:
(1) the owner of the information must reasonably believe that its release would benefit a competitor or cause detriment to himself (2) the owner must reasonably believe that the information is confidential and not already public knowledge; (3) the information must be judged bearing in mind the practice of the particular trade or industry. |
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Herbert Morris Ltd v Saxelby [1916] 1 AC 688
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Lord Parker stated that in order for an employer to gain such protection, it must be shown that the employee not only acquired knowledge of the customers but also had an
influence over them, such that should he leave to set up a business, they would join him. |
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Murgitroyd v Purdy (Unreported, High Court, 1 June 2005)
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Clarke J. emphasised the
importance of establishing not only that he knew the customers but that he could reasonably have exercised influence over them: Covenants against competition by former employees are never reasonable as such. They may be upheld only where the employee might obtain such personal knowledge of, and influence over, the customers of his employer as would enable him, if competition were allowed, to take advantage of his employer's trade connections ... |
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Nordenfelt v Maxim Nordenfelt (1894) AC 535
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A restraint of trade covering the entire world was not considered to be too wide as the company dealt in the arms and munitions trade, which would involve dealing with international governments.
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Office Angels Ltd v
Rainer Thomas (The Times, 11 April 1991) |
A clause providing that the employee could not work within 1,000m of the company was found to be too wide. The company was located in the middle of the financial district in London, therefore such a clause would effectively rule
out the entire city. |
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McEllistrem v Ballymacelligott Co-Op [1919] AC 548
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Restraint of trade prevented farmers from selling milk to other buyers within a 10 mlle radius. Notwithstanding the fact that 10 miles is not a particularly large geographic radius, the court nevertheless found that the restraint was unreasonable:
[I]n a sparsely inhabited agricultural neighbourhood, with scanty means of communication, a prohibition of trade in every township within a radius of ten miles, might have precisely the same effect upon the business of a small trader as if the preclusion extended to the remotest region of Donegal. |
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Mulligan v Corr [1925] IR 170
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An individual worked as a clerk for a solicitor in Ballina, Co. Mayo. The solicitor also had an office in Charlestown. The contract of employment contained a restraint of trade clause that prevented the clerk from: working as a solicitor within 30 miles of Ballina and Charlestown, in Co. Mayo, and wtthm 20 miles of Ballaghadereen, in Co. Roscommon. This clause was found to be excessive as it effectively ruled out the Connacht region for the clerk and went beyond what was necessary to protect the business.
Even if it severed the clause in relation to Ballaghaderreen the clauses in relation to Ballina and Charlestown were too wide so the whole clause failed. |
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Is the Restraint Reasonable in the Public Interest?
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Not only will the court examine the clause from the point of view of the parties to the
agreement but it will also take into consideration the general interests of the public at large. The courts have no interest in approving contracts that benefit the parties but are damaging to the general public, for example through the creation of a cartel. Thus in Fitch v Dewes [1 ?2 ~ J 2 A~ 158, a restraint of trade clause whereby a solicitor agreed not to practise law wtthm 7 miles of Tamworth was found to be reasonable as between the parties and the public at large. The House of Lords noted that "otherwise solicitors carrying on their business without a partner would be extremely chary of admitting competent young men to their office and to the confidential knowledge to be derived by frequenting those offices." |
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The Competition Act 2002
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The Competition legislation applies to agreements entered into by " undertakings". It would appear that the legislation fails to deal specifically with employment contracts, and employees will not be considered undertakings for the purposes of the legislation. Where an employee leaves to set up his/her own business, he/she will come within the legislation, but will not where he/she simply leaves to join another company as an employee.
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Peter Mark/Majella Stapleton (CA/1011/92E)
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M worked as a hair stylist with Peter Mark. She left to join a competing salon and argued that she was an undertaking for the purpose of the legislation because she was paid partly on a commission
basts and therefore had an interest in the success of the business. This claim was rejected by the Authority. |
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Nallen/O'Toole (CA/8~9~)
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The Authority ruled that a non-competition clause in a partnership agreement providing that the selling party would not compete in a similar business for three years within a 20 mile radius was valid. The Authority stated:
The Commission's view, which has been confirmed by the European Court of Justice is that [non-competition clauses] are essential to secure the transfer of the goodwill of a business to a new owner. They are regarded as not involving any restriction on competition but as essential to allow the full transfer of ownership, provided their duration and extent is only that which is necessary to secure the full transfer of the goodwill. If an agreement satisfies these criteria it has been found not to be in breach of Article 85(1). |
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Severance - the blue pencil test
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!he main distinction, as stated at the outset, between illegal contracts and void contracts is that in the case of the latter, the offending element of the contract can be struck out using a blue pencil or severed from the rest of the contract. The remainder will continue to be enforceable.
In the words of Costello J. in John Orr Ltd v John Orr [1987] ILRM 702: The courts may in some circumstances enforce a covenant in restraint of trade even though taken as a whole the covenant exceeds what is reasonable, by the severance of the void parts from the valid parts. The "Blue Pencil" test cannot be used to rewrite the contract. It will be used only where it is possible to draw a line through the offending words or clause without changing the overall agreement substantially. If it is impossible to use the blue pencil test because to do otherwise would change substantially what was agreed or would render the clause completely incomprehensible, then the whole clause will fall. The rationale for this rule is that the courts do not want to be found rewriting a poorly drafted clause to favour the employer when it should have been prepared properly in the first instance. Severance will only be applied where the removal of the offending words or sentences do not create any grammatical difficulty or render the clause incomprehensible. Severance will not be applied where to do so would leave the contract without adequate consideration i.e. the restraint in question was the whole or part of the consideration of the contract. Commentators have noted that severance is more likely to be applied in circumstances where the contract is drafted in such a way as to facilitate severability that is, where the clause is drafted in such a way that it comprises several distinct sub-clauses. Such an approach would allow the deletion of the offending clauses while retaining those which are deemed to be valid. |
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Skerry's College v Moyles (1907) 42 ILRT 46
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A teacher agreed not to teach within 7 miles of Belfast, Dublin and Cork for the three years following the termination of his employment. The court severed the reference to Dublin and Cork.
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Mason v Provident Clothing and Supply Company Ltd [1913] AC 724
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Lord Moulton:
It would be in my opinion be pessimi exempli if, when an employer had exacted a covenant deliberately framed in unreasonably wide terms, the Court were to come to his assistance, and, by applying their ingenuity and knowledge of the law, carve out of this void covenant the maximum of what he might validly have required. It must be remembered that the real sanction at the back of these covenants is the terror and expense of litigation, in which the servant is usually at a great disadvantage, in view of the longer purse of his master. [T]he hardship imposed by the exaction of unreasonable covenants by employers would be greatly increased if they could continue the practice with the expectation that, having exposed the servant to the anxiety and expense of litigation, the Court would in the end enable them to obtain everything which they could have obtained by acting reasonably ... [T]hey must take the consequences. |
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Marion White v Francis [1972] I WLR 1423
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The plaintiff could not be employed as an agent, servant or assistant in a hairdressers after her contract ended. The plaintiff argued that this meant she could not work as a bookkeeper or director, however, the court interpreted the clause more narrowly to mean active participation and upheld it.
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General Billposting Co Ltd v Atkinson [1909] A.C. 11
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An employer cannot enforce a restraint of trade clause in a contract of employment where he has repudiated that contract. The breach must be a fundamental one (for example where the employee has been wrongly dismissed by the employer, where there has, been the dissolution of a partnership in breach of
contract, or where there is a deliberate refusal to pay agreed remuneration under the contract.) Where a repudiatory breach exists, a restraint cannot be enforced by the insertion of a clause which provides that the restraint is valid regardless of how the termination of the contract of employment comes about. |
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Clarke v Newland 1991 1 AllER 397
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Two GPs were in a partnership. The contract stated that the GPs could not practice within the practice area for three years. The plaintiff argued this meant she could not work as a consultant or in a hospital, however, the court interpreted it more narrowly to mean GPs only and upheld it.
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