Back
1940 Supreme(SC) 49
Privy Council At Canada
Porter, Wright , Lord Russell of Killowen, Viscount Maugham, Justice Lord Chancellor , JJ.
Connors Bros. Ltd. and others -Appellant
Versus
Bernard Connors -Resopndent
Privy Council Appeal No. 54 of 1939
Decided On : 24-09-1940
Norton Rose Greenwell and Co., F.Gahan
A restrictive covenant in the sale of a business or its controlling shares is enforceable if it reasonably protects the goodwill from the seller's personal knowledge and skill and does not create a pernicious monopoly injurious to the public.
Headnote:(A) Restraint of Trade - Enforceability of restrictive covenants - For a contract in restraint of trade to be enforceable, the restraint must be reasonable both in reference to the interests of the contracting parties and in reference to the interests of the public, so framed and guarded as to afford adequate protection to the party in whose favour it is imposed, while being in no way injurious to the public. (Paras referencing Nordenfelt v. Maxim Nordenfelt Co. Ltd.)
(B) Sale of Goodwill and Shares - Where a controlling interest in a company is sold, a covenant by a manager or director not to compete is treated on the same footing as a sale of the goodwill of the business. It is reasonable for a purchaser to obtain an obligation restraining the seller from competing within bounds that, having regard to the nature of the business, are reasonable and limited in respect of space. (Paras referencing Morris (Herbert) Ltd. v. Saxelby)
(C) Reasonableness of Geographic Scope - In the case of a large manufacturer or merchant, it is not necessary to prove that the business was carried on in every single part of the mentioned area to justify a geographic restriction. A restriction covering a whole country is reasonable if the business was carried on throughout that country, as the goodwill cannot be adequately protected if the vendor is free to establish a competitive business in adjoining areas where actual sales cannot be proven. (Paras referencing Morris (Herbert) Ltd. v. Saxelby)
(D) Public Interest and Monopoly - A restraint is considered injurious to the public only if it is calculated to produce a pernicious monopoly that enhances prices to an unreasonable extent. If the restraint is reasonable between the parties and other persons remain free to enter the business, it is unlikely to be held injurious to the public.
Facts of the case:
The respondent and his father, who managed a fish canning business, sold a controlling interest in their company to the appellants. As part of the transaction, the respondent entered into a restrictive covenant agreeing not to engage directly or indirectly in the same business within the jurisdiction, not to use specific brands, and not to use the family name in connection with the business for a period of ten years. After the time limit for the name restriction expired, the respondent sought a declaration that the non-compete clause was unenforceable as a restraint of trade.
Findings of Court:
The covenant prohibiting the respondent from engaging in the business as an owner or in partnership within the jurisdiction is binding and enforceable. The court declined to answer whether holding shares in an incorporated company or working as an employee would constitute a breach of the covenant.
Issues: Whether a covenant restricting a former manager and shareholder from engaging in a specific business within a national jurisdiction is reasonable and enforceable, or whether it is void as a restraint of trade contrary to public policy.
Ratio Decidendi: The court reasoned that the covenant was an essential feature of the transaction to protect the purchaser from the seller's personal knowledge and skill. The geographic restriction to the entire country was reasonable because the business operated nationwide. In the context of protecting goodwill, the absence of a time limit is generally acceptable. Furthermore, the restraint did not create a pernicious monopoly as other competitors could and did operate in the same industry.
Result: Appeal allowed to the extent that the respondent is barred from engaging in the business in the jurisdiction as owner or in partnership.
Legal Category Hierarchy
-
contract law
-
restraint of trade
- reasonableness of covenants
- sale of goodwill
-
restraint of trade
-
practice and procedure
- originating summons
Viscount Maugham.: -
This is an appeal from a judgment of the Supreme Court of Canada dated 19th December 1938, which (by a majority of three Judges to two) reversed the judgment of the supreme Court of New Brunswick, appellate division. The latter had dismissed an appeal from a judgment of Chief Justice of New Brunswick.
The divergence of judicial opinion is striking, since six Judges in Canada were in favour of the present appellants and three-the majority in the Supreme Court of Canada- took the other view. These differences have perhaps been accentuated by the curious shape which the proceedings assumed. The main question has throughout been whether certain covenants entered into by Bernard Connors, the present respondent, with the appellants or any of those covenants are enforceable or whether on the other hand they are unenforceable as being in restraint of trade. This question has been raised not in proceedings instituted by the covenantee to enforce some or one of the covenants, but by an Originating Summons issued under O. 54A of the Rules of the Supreme Court of New Brunswick by the covenantor (the respondent, seeking to have it determined whether upon the construction of the covenants he was barred from engaging in a certain business or from doing certain other acts. These questions were not in the main matters for construction at all, though incidentally some matters of construction might have arisen for the consideration of the Court. They were questions of law based on public policy depending to a large extent no doubt on the circumstances proved to exist at the time when the covenants were entered into.
It is to be noted that the Chief Justice of New Brunswick seems to have entertained grave doubts as to the propriety of such a proceeding under O.54A. To their Lordships it seems clear that those doubts were more than justified. In the event the case proceeded without the advantage of pleadings or particulars or discovery of documents. The respondent made a concise affidavit in support of his summons in which he stated no facts or circumstances relating to the covenants beyond the statement that he was advised that they were not reasonably necessary for the protection of the appellants in their business and were in the nature of an effort to stifle or prevent lawful competition. At the trial he was cross-examined on his affidavit and no further evidence was called on his behalf. The appellants then called three witnesses. In these circumstances it is not surprising that the evidence before the Court was not of a very satisfactory character, and that differing opinions as to its result have been formed by the Judges in Canada who have had to deal with the matter. Their Lordships have thus to deal with an appeal on questions raised under O. 54A, New Brunswick Judicature Act , which was not in their view an appropriate method of dealing with those questions; but, having regard to the fact that three Courts have delivered their judgments on the footing that the questions were properly raised before them, their Lordships feel bound to follow the same course and to express their opinion on the materials submitted to them. It should be added that the respondent did not lodge his case in the usual way and was not represented on the present appeal. Their Lordships naturally regret this circumstance which adds to their difficulties; but they think it right to state that counsel for the appellants argued on their behalf with great candour and fairness, and they do not think that the respondent has suffered by reason of the absence of counsel on his behalf.
In or about the year 1890 the respondent's father and uncle Lewis and Patrick Connors established a business of canning fish of divers kinds including fish called sardines, in the Passamoquoddy area on the Bay of Fundy. It is not in dispute that this is the only area in Canada where it is commercially practicable to pack sardines, though there are a number of sardine packe
