The Gazette 1996

GAZETTE

AUGUST/SEPTEMBER 1996

Restraint of Trade and Competition Law in Ireland

by Marguerite Bolger, Barrister. 1. Introduction Restrictive covenants have always been a part of business, primarily in contracts for the sale of a business, employment contracts and property leases and are designed to prevent unfair competition. Ostensibly restrictive covenants are a threat to competition, but are a necessary part of commercial life and can be justified provided certain criteria are satisfied. In this article it is proposed to examine the common law restraint of trade doctrine, the extent to which the doctrine has been affected by competition law and the compatibility of restrictive covenants with Section 4 of the Competition Act 1991. It will be seen that great care needs to be taken in drafting restrictive covenants as it cannot be assumed that the purchaser of a business or an employer has unlimited freedom to restrict the post contractual activities of the other part of the contract. 2. The Common Law Doctrine of Restraint of Trade The history of the doctrine of restraint of trade lies in the medieval guild system which depended on restricting trade to guild members . In the watershed case of Mitchel -v- Reynolds 2 Parker C.J. made the vital distinction between general restraints which were automatically void, and limited restraints which might be upheld if "good and useful". Thus developed the requirement that a restraint of trade must constitute some benefit to the public in order to be valid. Since the development of that requirement, two other criteria have also been established that must be satisfied for a restraint of trade to be upheld. Firstly, there must be a legitimate interest to be upheld and secondly the restraint must be reasonable inter partes as to time, space and subject matter. Each of the three criteria will be examined separately.

2(iii) Reasonable in the public interest.

Whilst accepting public interest as a relevant criteria, some UK judges have demonstrated a reluctance to consider the wider public issues that might be relevant, such as proper allocation of economic resources or potential effects on inflation . By contrast, the Supreme Court has broken new ground in their consideration of the public interest. In Eddie Mac ken -v- Reilly the Court examined a policy, which obliged Irish show jumpers toride only Irish bred horses, in the light of its impact upon the horse breeding industry in Ireland. The Court refused to strike down the policy as an unreasonable restraint of trade. The then Chief Justice said: "The need for the rule in the first instance and the object of maintaining it was and is to build up the Irish half- bred horse industry in the interests or equestrian sport generally in the country. It is the view of the federation fairly and reasonably held, that in doing so it is serving the interests of the generality of young riders of limited means and thereby serving the general interests of 9 the public" . Possibly, the law in Ireland diverges somewhat from the position in the UK in this area of public interest. The decision in Macken seems to suggest a balancing approach whereby the public interest can justify a restraint of trade, even where that restraint in unreasonable inter partes. Thus, the criteria of public interest is established as an independent ground of validity which can save a restraint of trade that goes beyond what is reasonable in terms of time, space and subject matter. 3. The Intervention of Competition Law Section 4(1) of the Competition Act 1991 states, inter alia, that "all agreement between undertakings, 22X

Marguerite Bolger

2(i) The interest to be protected The traditional interests deemed by the courts to merit protection via a restraint of trade have been the sale of a business, the employment relationship and property leases, but these interests are not exhaustive. Other interests may also be protected although an express covenant would probably be required whereas the traditional interests of the sale of a business or employment are, to an extent, protected even without an express covenant. The supply of petrol outlets to the public , the exclusive storage and sale of ice-cream products and the sale of dairy produce have all been accepted as legitimate interests which may merit protection. 2(ii) The Restraint of Trade must be reasonable inter partes. A restraint of trade is a severe encroachment of an individual's freedom to contract and to do business. Thus, to be deemed valid it must be no more than is absolutely necessary to protect the legitimate interest. What is necessary will clearly depend on the circumstances of each case, but as a general rule is must be properly limited in time, space and subject matter.