The subject matter under consideration was brought to notice as a result of judicial comments made regarding the inequitable consequences which, at times, result from the inability of Courts to enforce certain covenants in restraint of trade. Although these comments have been made in respect of covenants in contracts for the sale of the goodwill of a business, it is necessary to consider all classes of contracts in which such covenants are found.

Generally speaking, a contract in restraint of trade may be described as one which restricts the right of a person to carry on his trade or profession.

The common instances of such contracts are of four distinct kinds, namely:-

First, those by which an employee agrees that, after leaving his present employment, he will not compete against his employer, either by setting up business on his own account or by entering the service of a rival trader.

Second, those by which the vendor of the goodwill of a business agrees that in future he will not carry on a similar business in competition with the purchaser.

Third, those by which manufacturers or merchants form a combination for the purpose of regulating their trade relations, as, for instance, by agreeing to restrict the output or to fix the selling price of a certain commodity.

Fourth, contracts by which restraints are imposed upon -

(a) retailers or distributors;

(b) licensees in respect of the manufacture, use or distribution of a scientific formula, or technical product; and

(c) agents for the receipt of processed goods.

The doctrine of public policy applies to each of these four classes of case but not to the same degree, for the common law has looked with less favour on the first than upon the other three classes of case.

The law was laid down by Lord Macnaghten in Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Company ((1894) A.C.535 at page 565):

"All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable - reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the, party, in whose favour it is imposed, while at the same time it is in no way injurious to the public."

The law as thus laid down was held to be a correct statement in Mason v. Provident Clothing and Supply Co. Ltd. ((1913) A.C.724).

Thus all covenants in restraint of trade are prima facie void and unenforceable unless the Court can find that the restraint was reasonable in the circumstances of the particular case.

The law does not condemn every covenant that is in restraint of trade for it recognises that in certain cases it may be legitimate, and indeed beneficial, that a person should limit his future commercial activities, as, for example, where he would be unable to obtain a good price on the sale of his business unless he came under an obligation not to compete with the purchaser (Vancouver Halt and Sake Brewing Co. Ltd. v. Vancouver Breweries Ltd. ((1934) A.C. 181) per Lord Macmillan at page 189).

The question whether the restraint ought to be held injurious to the public must be decided by having regard to whether the restriction is calculated to produce a pernicious monopoly - that is to say, a monopoly calculated to enhance prices to unreasonable extent. It is well settled that the onus of establishing such a proposition is upon the party which attacks the covenant. When the Court is satisfied that the restraint is reasonable as between the parties it must,-always be very difficult to prove in a case connected with goodwill that the public interest is affected. (Connors Bros. Ltd. v. Connors ((1940) 4 All E.R.179) per Viscount Maugham at page 195.)

In discussing these and other decisions, Lord Wilberforce in Esso Petroleum Co. Ltd. v. Harper's Garage (Stourport) Ltd. ((1968) A.C.269) said (at page 332):

"How, then, can such contracts be defined or at least identified? No exhaustive test can be stated - probably no precise non-exhaustive test. But the development of the law does seem to show that judges have been able to dispense from the necessity of justification under a public policy test of reasonableness such contracts or provisions of contracts as, under contemporary conditions, may be found to have passed into the accepted and normal currency of commercial or contractual or conveyancing relations. That such contracts have done so may be taken to show with at least strong prima force that, moulded under the pressures of negotiation, competition and public opinion, they have assumed a form which satisfies the test of public policy as understood by the courts at the time, or, regarding the matter from the poi-it of view of the trade, that the trade in question has assumed such a form that for its health or expansion it requires a degree of regulation. Absolute exemption for restriction or regulation is never obtained: circumstances, social or economic, may have altered, since they obtained acceptance, in such a way as to call for a fresh examination: there may be some exorbitance or special feature in the individual contract which takes it out of the accepted category: but the court must be persuaded of this before it calls upon the relevant party to justify a contract of this kind.

"Some such limitation upon the meaning in legal practice of 'restraints of trade' must surely have been present to the minds of Lord Macnaghten and Lord Parker. They cannot have meant to say that any contract which in whatever way restricts a man's liberty to trade was (either historically under the common law, or at the time of which they were speaking) prima facie unenforceable and must be shown to be reasonable. They must have been well aware that areas existed, and always had existed, in which limitations of this liberty were not only defensible, but were not seriously open to the charge of restraining trade. Their language, they would surely have said, must be interpreted in relation to commercial practice and common sense."

Later, His Lordship said that the second limb of the test, i.e., whether the restriction should be held to be against public interest, should continue to be recognised, although he added (at page 341) that he would prefer to speak of it as "the wider aspects of a simple public policy rule.............”

The judicial comment which gave rise to a consideration of this subject first appeared in Mertel v. Rigney (1939) (56 W.N.122). In that case the defendant had sold his mixed business to a purchaser and covenanted that neither he nor his wife would, for a period of five years, carry on or be employed in carrying on a mixed business of a similar nature within a radius of three miles. The facts were that the defendant, within this prescribed period, entered into a similar business situated less than half a mile from where the subject business was carried on. Nicholas J. found that the covenant was too wide to be reasonable in the interests of the parties and accordingly dismissed the proceedings. In the course of his judgment, His Honour said (at page 123):

"I have come to the conclusion, having regard to the nature of the business, to the evidence that was given of the way in which it was carried on, very slight evidence, the figures of population that were put in, and the number of shopping centres within the prescribed area, that this covenant is too wide, and I can only say that any judge coming to such a conclusion on facts such as these does so with great regret because he is allowing a man to recover for himself property for which he has been paid without himself repaying any of the purchase money, That is an act which I have to sanction until the legislature amends the law in this respect, so that a covenant is enforceable to the extent necessary to protect the purchaser."

The course proposed by His Honour was not adopted by the legislature and the matter was again referred to in Papastavrou v. Gavan ((1968) 2 N.S.W.R.286). This was a suit for rectification of an agreement for the sale of a business and for an injunction to enforce a covenant in restraint of trade. By the agreement as it might have been rectified the defendants would have undertaken, inter alia, that they would not for a period of three years and within a radius of three miles carry on a hairdressing salon business. Isaacs J. drew attention to the care which should be taken in framing restrictions of this type and pointed out that the radius of three miles is a circle with a diameter of six miles containing an area of twenty eight square miles. He referred to the decision of Nicholas J. in Mertel v. Rigney (supra) and said:

"There is, in my view, nothing so special in relation to the hairdressing business of the defendants, where all the business was done on the premises, warranting such a wide area. There must be very few special types of businesses indeed which warrant a protection of 28 square miles in the metropolitan district."

However, His Honour adopted what had been said by Nicholas J. in Mertel v. Rigney (supra) and repeated that portion of the judgment which is quoted above.

In deciding whether a covenant in restraint of trade is or is not reasonable, opinions of individual judges may vary in particular cases. For example, in Pyle v. Sharpe Bros. Pty. Ltd. (Unreported - 29th April 1968) the Court of Appeal considered whether a covenant in restraint of trade was reasonable in the interests of the parties. Wallace P. thought that it was not reasonable whereas Walsh J.A. and Holmes J.A. took the same view as the primary Judge, Street J., and held that the covenant was reasonable and enforceable. Walsh J.A. observed that it is not easy to reconcile all the authorities and he thought that it was possible to discern some changes from time to time in the emphasis put on the desirability of restricting any imposition of fetters upon freedom to trade or to work, and the competing desirability of holding contracting parties to their bargains. He added that he thought that the instant case was one in which different minds might reach conclusions on the ultimate question of the reasonableness of the restraint.

It is a curious result of the development of the law that when a vendor of a business, for example, enters into a covenant in restraint of trade to protect the goodwill of the business in the hands of the purchaser, the Court is unable to enforce it to an extent which would, in the circumstances be reasonable. In coming to the conclusion that the covenant is too wide and accordingly unreasonable and unenforceable, even though the action of the defendant is in breach of such a covenant as would be reasonable In the circumstances, the judge must dismiss the proceedings before him. By so doing he is allowing a man to recover for himself property for which he has been paid without himself repaying any of the purchase money. The Court cannot order a vendor to refund any part of the purchase money he has received for the goodwill, even if he has, in fact, stolen it back from the purchaser. The legal result is that a vendor who gives a covenant which is, in fact, too wide, and accordingly unreasonable and unenforceable, can open a business in opposition to that which he has sold, almost at once, and in premises immediately adjoining, those where the subject business is carried on, and thus steal back the custom he has sold to the purchaser as part of the goodwill.

The problems which arise from the application of the law set out above to individual cases have, as their basis, the attitude of the courts towards severance of illegal contracts. Generally speaking, the courts will not enforce a covenant to the extent, but only to the extents that it is considered reasonable. It is only in limited cases that the courts will treat the unreasonable, and accordingly invalid, portion of the covenant as severable from the reasonable portion. In discussing this problem, Lord Moulton, in Mason v. Provident Clothing and Supply Co. Ltd. ((1913) A.C.724) said (at page 745):

"It was suggested in the argument that even if the covenant was, as a whole, too wide, the Court might enforce restrictions which it might consider reasonable (even though they were not expressed in the covenant), provided they were within its ambit. My Lords, I do not doubt that the Court may, and in some cases will, enforce a part of a covenant in restraint of trade, even though taken as a whole the covenant exceeds what is reasonable. But, in my opinion, that ought only to be done in cases where the part so enforceable is clearly severable, and even so only in cases where the excess is of trivial importance, or merely technical, and not a part of the main purport and substance of the clause. It would in my opinion be pessimi exempli if, when an employer had exacted a covenant deliberately framed in unreasonably wide terms, the Courts 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. It is sad to think that in this present case this appellant, whose employment is a comparatively humble one, should have had to go through four Courts before he could free himself from such unreasonable restraints as this covenant imposes, and the 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."

Although not relevant to the question under discussion, we feel that we should cite from the judgment of Long Innes J. in Marquett v. Walsh ((1929) 29 S.R.298) as follows (at page 311):

"Now that it is beyond doubt that a restraint against competition in itself is not permissible, and the degree of protection available to the employer is limited to protection of his proprietary interests against an abuse by his former employee of the objective knowledge gained by the latter during the course of the employment, I personally can see no reason why in these cases the Courts should lean in favour of the employee and whatever may be the case in other countries, I doubt whether the views expressed by some very eminent Judges in England as to the comparative helplessness of the employee have more than slight applicability in this country, where every class of labour is strictly organised, where the terms and conditions of employment during employment are prescribed with meticulous exactitude by impartial tribunals established by legislative authority, where the interests of each individual employee are carefully watched by energetic trade union officials, and where even the high handed action of the defendant in this case is apparently supported by the full weight of his union."

In discussing Lord Moulton's statement in Masonts case (supra), Sargent J. said in S.V.Nevanas & Co. v. Walker and Foreman ((1914) 1 Ch.413 at page 423):

"I do not think that those remarks were intended to be applicable to cases where the two parts of a covenant are expressed in such a way as to amount to a clear severance by the parties themselves, and as to be substantially equivalent to two separate covenants. No question of the kind was involved in the case before the House of Lords, and I think that Lord Moulton was not intending to deal with the numerous cases of high authority in which the good part of such a covenant was held to be enforceable, notwithstanding its collocation with a bad part, but was only thinking of those cases in which some severance has been effected by the Court, and the covenant has not been held bad merely because it might work unreasonably in certain exceptional circumstances not within its main and principal purpose, and meaning."

But the predominant principle is that the court will not rewrite the promise as expressed by the parties. It will not add to or alter words and thus frame a promise that the promissor might have, but did not, make. If a promise is to be severable, the parties themselves must have sown the seeds of severability in the sense that it is possible to construe the promise expressed by them in the contract as severable into a number of separate and independent parts. It would be possible for parties to enter into a series of covenants each for a different period of time and each covering a different area. In that event each would be severable and any breach or threatened breach of the covenant would have to be shown to fall only within the least restrictive of the covenants applicable. But this is not the normal procedure, and if the covenant is expressed as a single promise in terms which the Court considers to be unreasonable, it will not be enforced.

In the English courts, views such as those set out in Mason's case (supra) have been expressed to the effect that it would be undesirable that the Court should come to the assistance of a party to a contract who had obtained a covenant in excessively wide terms. But the contrary view has also been expressed. In S. W. Strange Ltd. v. Mann ((1965) 1 W.L.R.629) Stamp J. said (at page 642):

"It is no doubt a defect in the law that the Court has no power to reframe such a covenant as is here in question so as to make it no more thin 'adequate to afford legitimate protection at the time it takes effect.’”

A similar approach has been adopted in at least some of the United States of America.

The law is discussed in Corbin on Contracts (a well known American work of authority) in Volume 6A, paragraph 1390 at page 66 where the learned author says:-

"An agreement restricting competition may be perfectly reasonable as to a part of the territory included within the restriction but unreasonable as to the rest. Will the courts enforce such an agreement in part while holding the remainder invalid? It renders no service to say that the answer depends upon whether or not the contract is 'divisible'. 'Divisibility' is a term that has no general and invariable definition; instead the term varies so much with the subject-matter involved and the purposes in view that its use either as an aid to decision or in the statement of results tends to befog the real issue.

"With respect to partial illegality, the real issue is whether partial enforcement is possible without injury to the public and without injustice to the parties themselves. It is believed that such enforcement is quite possible in the great majority of cases. If a seller whose business and good will do not extend beyond the city limits of Trenton promises not to open a competing business anywhere within the state of New Jersey, the restriction is much greater than is reasonable. This is a good reason for refusing to enjoin the seller from doing business in Newark; but it is not a good reason for permitting him to open up a competing store within the same block in Trenton.

"In a good many cases it was held that if the contract itself indicated no geographical line between the reasonable and the unreasonable, it was ‘indivisible’ and illegal as a whole. Thus, if a seller promised not to compete anywhere in England the whole was void, but if he had promised not to compete in London or elsewhere in England, partial enforcement was possible in case the business had extended throughout London.

"The rule that is applied in the line of cases following Mallan v. May, supra, has been colorfully described as the 'blue pencil rule,, sometimes with approval and sometimes to discredit it. By this rule, the divisibility of a promise in excessive restraint of trade is determined by purely mechanical means: if the promise is so worded that the excessive restraint can be eliminated by crossing out a few of the words with a 'blue pencil,' while at the same time the remaining words constitute a complete and valid contract, the contract as thus 'blue pencilled' will be enforced. By some occult process, the courts adopting this rule convinced themselves that partial enforcement without the aid of a 'blue pencil' would be 'making a new contract for the parties' while partial enforcement in the wake of a 'blue pencil' is not. In very many such contracts, it would be possible to eliminate all the illegal restraint by 'blue pencilling' the restraining promise as a whole, while the remaining words would constitute a complete and valid employment contract or one for the purchase and sale of a business. Perhaps this should be held improper as causing an excessive erosion of the blue pencil.

"In very many cases the courts have held the whole contract to be illegal and void where the restraint imposed was in excess of what was reasonable and the terms of the agreement indicated no line of division that could be marked with a 'blue pencil.' In the best considered modern cases, however, the court has decreed enforcement as against a defendant whose breach has occurred within an area in which restriction would clearly be reasonable, even though the terms of the agreement imposed a larger and unreasonable restraint. Thus, the seller of a purely local business who promised not to open a competing store anywhere in America has been prevented by injunction from running such a store within the same block as the one that he sold. In some cases it may be difficult to determine what is the exact limiting boundary of reasonable restriction; but often such a determination is not necessary. The question usually is whether a restriction against what the defendant has in fact done or is threatening would be a reasonable and valid restriction. The plaintiff should always be permitted to show the actual extent of the good will that is involved and that the defendant has committed a breach within that extent. If a restriction otherwise reasonable has no time limit, it is quite possible for the court to grant injunctive relief for a specific and reasonable time.

"Fullerton Lumber Co. v. Torborg, 70 N.W.2d 585, 270 Wis. 133 (1955), holds that a restrictive provision in an employment contract, binding an employee not to compete for a period of ten years was unreasonable, but that it would be enforced for the reasonable period of three years. The reasoning of this section is followed and the court quotes from S1394. One judge dissented. Since the employee had at once opened a competing business, much to the injury of his employer's business, the court made the three year period begin at the date of the judgment instead of the date of termination of the contract. See also s.c., 80 N.W.2d 461, 274 Wis. 478 (1957), where the same injunction was sustained, and in addition the plaintiff was held entitled to damages for the defendant's breach, recoverable in the same action.

"What has been said above with respect to 'divisibility' of territory included within the restriction is equally applicable where the restriction is excessive in matters other than extent of time or space. Thus, when a baker sells his business and good will to a large department store and promises not to compete in any way with the business carried on by the buyer, the restraint is excessive and illegal. But the fact that in the restraining promise no division is suggested between the baker business and the many other departments run by the buyer, such as furniture, dress goods, or hardware, does not prevent a court from making such a division. The living facts make as clean a division between bread and furniture as do the two words themselves; and the court should enforce the baker's promise not to compete in the baker line so far as the business sold by him had established customers and good will, while refusing to enforce his promise not to compete in furniture and hardware. The contract would be enforceable in part if it had named all the departments separately or had said 'bakery and other departments,' although it is clear that this in no way affects the character of the illegality or the extent of harm to the public."

We believe that a rule for partial enforcement will be the better rule. This is the view taken, not only by Corbin, but also by Williston on Contracts, revised edition, paragraph 1660, and is receiving growing acceptance by the courts in the United States. Our tentative proposal is that a promise in restraint of trade should be enforceable to the extent but only to the extent, that it is not against public policy and that such a promise should be severable whether or not the promise is in severable terms.

We have considered whether such a rule slid be applied to all promises in restraint of trade and our tentative conclusion is that there is no reason to differentiate between any of the four classes of contract mentioned above. Broadly speaking there is complete freedom of contract in other fields and we can see no reason why a promise which has been given for valuable consideration should not be enforced to the extent that it is not against public policy.

We have also considered whether there should be some express provision preserving the interests of the public. We have already referred to the case of Connors Bros. Ltd. v. Connors_(supra) where it was said that where the court is satisfied that the restraint is reasonable as between the parties, it must always be very difficult to prove, in a case connected with goodwill, that the public interest is affected. Our proposal will not make any change in the law on this point. More modern views of the extent to which the public interest should be preserved will be protected by the existence of local legislation, namely the Monopolies Act, 1933-1939, and The Trade Practices Act, 1965-1966 (Commonwealth).

We tentatively propose an amendment to the Conveyancing Act, 1919, in the form of Appendix “A” hereto.