Court of Appeal restates test for enforceability of pre-termination restraints of trade and finds tortiously induced breach

Ajay Ratan

In One Money Mail Ltd v Ria Financial Services and another [2015] EWCA Civ 1084, the Court of Appeal helpfully restated the test for enforceability of pre-termination restraints of trade and concluded that a third-party competitor had tortiously induced breach of such a restraint.

This agency dispute set in agricultural Herefordshire provided fertile ground for the Court of Appeal’s consideration of two key questions concerning the use and abuse of restraints of trade. First, when will a restraint of trade that applies during the currency of a contract be enforceable? Second, what kind of conduct by a third party can give rise to tort liability for inducing breach of such a restraint?

The facts

In October 2007, One Money Mail Ltd (“OMM”) entered into a contract with Mr Wasilewski (“W”) for the latter to act as an agent offering money transfer services to Polish workers. The contract contained (1) an exclusivity clause requiring W not to operate as a principal or agent for another money transfer organisation during the currency of the contract; and (2) a 6-month post-termination restrictive covenant in familiar and unremarkable terms.

In October 2010, after discovering that OMM had appointed another agent in his area, W approached a competitor money transfer organisation, Ria Financial Services Ltd (“R”). R contacted W to point out that there might be an exclusivity clause in his contract with OMM. W responded that he did not think there was any such restriction. The judge found that R knew perfectly well that there was an exclusivity provision in all of OMM’s contracts and nonetheless entered into its own agreement with W for him to serve the Polish market.

In September 2012, OMM discovered that W had entered this agreement with R. OMM later gave W notice to terminate its agreement with him and issued proceedings claiming damages against W (alleging breach of the exclusivity provision and post-termination restraint) and R (alleging the tort of inducing breach of contract).

Enforceability of pre-termination restraints of trade

The principle that a contractual term which amounts to an unreasonable restraint of trade is unenforceable applies to restrictions whether they take effect before or after termination. The judge at first instance held that the exclusivity clause and post-termination restraint were both unenforceable on that basis. The Court of Appeal disagreed and upheld both clauses. Its reasoning in relation to pre-termination restrictions is particularly instructive. As Longmore LJ, giving the sole reasoned judgment, emphasised at [5]: ‘the court must be careful not to fetter what one may call ordinary commerce. Sole agencies are common in ordinary commerce and there would, therefore, have to be something specially restrictive before the restraint of trade principle will be effective.’

This begs a key practical question: what special feature must a pre-termination restriction have before the restraint of trade principle will apply to it? Longmore LJ supplied the answer at [6]-[13] by drawing on the decision of the House of Lords in Esso Petroleum Co Ltd v Harpers Garage (Stourport) Ltd [1968] AC 269. The resulting principles appear to be as follows:

(1) the restraint of trade principle should not apply to pre-termination restrictions in sole agency agreements ‘unless in some way the agent’s ability to work could be said to be sterilised in that he could only work for a party who might not choose to absorb his output’;

(2) this key question of ‘sterilisation’ is to be judged at the time the contract was made, not in light of subsequent events;

(3) the ability of the principal to appoint another agent cannot be decisive of the issue.

Longmore LJ held on the facts that the exclusivity clause was enforceable. OMM was obliged to process, and pay commission on, work that was in fact carried out by W. Further, although the contract did not prevent OMM from appointing other agents, there were legitimate reasons why that might need to be done (for example, to meet a future increase in demand). Accordingly, the restriction did not ‘sterilise’ W’s ability to work.

This is a useful illustration of the cautious approach that courts are likely to take when asked to hold that a common commercial agreement which necessarily contains a pre-termination restriction involves an unenforceable restraint of trade.

What does it mean to ‘induce’ a breach of contract?

A person who intentionally induces another to breach a contract may be held liable in tort on that basis. This is a useful weapon in a claimant’s arsenal. By pursuing not only the contractual counterparty but also an accessory to the breach, it may be possible to find a solvent and stable defendant who is better able to satisfy a judgment against them.

One difficult issue is what amounts to inducement on a particular set of facts. The judge had held that, if she was wrong to conclude that the restrictions were unenforceable, R had indeed induced W to break his contract with OMM. R cross-appealed on this point. Although it became academic because OMM had proved no loss at first instance and the Court of Appeal declined to remit for a damages hearing, Longmore LJ briefly dealt with the point and agreed that R had induced W’s breach. There are two aspects to highlight.

First, Longmore LJ identified an inducement by drawing an analogy with the tangled doctrine of joint tortfeasance. If two persons combine to do or secure the doing of acts which constitute a tort, they will be jointly liable for the tort. This doctrine is distinct from the tort of inducing breach of contract (where the primary wrong is a breach of contract). Despite this distinction, his Lordship appeared to focus not on inducement but rather on whether R and W had ‘combined’, concluding at [28] that they had ‘combined to the extent of making a contract which was or made provision for the very act which was a breach of [W’s] contract with OMM’. It remains to be seen whether this approach will be adopted in a case where the issue is more than academic.

Second, it was apparently assumed at first instance and on appeal that if the restrictions were unenforceable restraints of trade, there could be no liability in tort for inducing their breach. It appears, however, to be at least arguable that breach of an unenforceable clause is a sufficient hook for liability in tort: for discussion of the sparse case law on this point see Paul S Davies, Accessory Liability (Hart Publishing, 2015) at pp.144-5.

The full judgment can be read here.

Ajay Ratan, Blackstone Chambers

This post is reproduced with permission from Blackstone Chambers’ Employee Competition Bulletin.  If you would be interested in receiving the bulletin, please contact Mat Swallow at MatSwallow@blackstonechambers.com.

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