Some clarity on restraint of trade

  • Insight

08 January 2019

The extent to which the law accepts covenants which restrict competition following a business acquisition has been fought through many a court. From time to time, the courts try to set guidelines which assist those drafting such clauses. The goodwill of a business can be an essential part of an acquisition that purchasers have always, and will always seek to maximise the protection they can achieve. In this case, the Sheriff Appeal Court has just given a decision which may strengthen the hand of the purchaser.

Nekrews and another v PMAC Scientific Limited was a case where the appellant sued for a deferred instalment of the purchase price and the respondent argued that it was not due as a consequence of breach of contract. The alleged breach related to a restrictive covenant. The contract provided that the seller required to procure that any associate would refrain from certain activities. The point before the appeal court was whether such a provision could amount to restraint of trade. Generally an unreasonable restraint of trade provision is unenforceable.

The respondent argued that the obligation to procure was not a restraint of trade since the respondent had no right of recourse against the associate and this was simply an obligation undertaken by the appellant which was breached. The court decided that the respondent’s argument should succeed, thus opening the door for more onerous undertakings being sought.

However, the door may not be as wide as it appears since the court accepted that it was not asked to consider other relevant factors such as public interest or impossibility to perform. The likelihood is that this case will be used to justify the enforceability of undertakings to procure an acceptance of restraints by third parties to a contract, but in reality each case will still need to be considered in the context of the particular facts which apply.

Our commercial disputes experts are able to offer advice on such issues and other aspects of commercial contracts.