Restraint Of Trade & Parole Evidence Rule: Analysis And Case Study

Advise Mr Laurel as to his legal rights based on your understanding of the materials covered in Modules 1 and 2.

In the given scenario the issues that have identified are enumerated below:

• Whether the restraint of Trade clause incorporated in the contract would have any effect
• What impacts will the representations that had been made to Hardy prior to the sale have
• What remedies are available to Laurel in relation to the facts of the scenario

It can be stated that employers are often worried about protecting the interests of their after their employees leave to work for their competitors. Restraint of Trade can thus be defined as a doctrine which relates to the enforceability of contractual restrictions on the freedom of conducting business. The definition of restraint of trade clause had been first provided in Nordenfelt v Maxim, Nordenfelt Guns and Ammunition Co [1894] AC 535.  Restraint of Trade intends to protect proprietary interests or trade secrets of a business. However it can be stated that Restraint of trade clauses are only enforceable as long as it is not contrary to public policy or it is reasonable to the party against whom the restraint of trade clause is made. It can be mentioned that for a restraint of trade clause to be valid, it is essential for both the parties to provide consideration. The common law doctrine of restraint of trade clause continues to operate in Australia as long as such clause does not contradict with the statutory provisions of the Competition and Consumer Act 2010. It can be stated in accordance with section 4M of the Competition and Consumer Act 2010 that this act does not affect the operation of:

• Law which is related to the restraint of trade as long as such law operates concurrently with the provisions of act
• Law which is related to the breach of confidence

However section 51 provides the exceptions in relation to Restraint of Trade Clause. It has been provided in section 51(2) that in order to determine whether the provisions of the this part has been contravened other than sections 45D, 45DA, 45DB, 45E, 45EA or 48 no consideration will be paid to the following:

• Any act done in relation to the arrangement or making the contract which particularly relates to the work hours, conditions of employment, working conditions of employees and remuneration to be paid to the employees
• Any provision of a contract which imposes restriction of freedom on any person and such restriction is accepted by the employee. Such restriction can be in relation to the conduct of employees that such employees may engage during or subsequent to the termination of the contract. 

All restraints of trade clauses are considered to be void unless:

• Such restraint clause is in the best interest of the public
• Such restraint of trade clause is in the best interest of the parties to the contract.   

As held in the case of Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 a wide range of elements are considered by the courts in order to assess legitimate interest of the parties. It can be stated that when assessing the reasonableness of the legitimate interest, the courts assess whether the restraint does more than what it is necessary to protect the interest of the parties.  In accordance with the judgment of the case Vancouver Malt and Sake Brewing v Vancouver Breweries [1934] AC 181 it can be stated that mere protection  against competition does not constitute legitimate interest.  Further in accordance with the judgment of the decision Adamson v New South Wales Rugby League Ltd, it can be stated that the time for assessing the reasonableness of the restraint of trade clause, the date when the restraint was imposed would be considered and not the date on which the restraint is sought to be imposed.

Exceptions to Restraint of Trade Clause

In this given scenario the parole evidence is of significant importance. The parole evidence rule states that in case of a written contract which is signed by the parties, such parties to the contract would not be allowed to alter the terms of the contract. The parole evidence rule is generally applied by the courts to give effect to the written terms and disregard any other oral agreements between the parties. However, there are certain exceptions to the parole evidence rule where courts consider oral agreements between. Examples of such exceptions are:

• Collateral contract
• Promissory estoppel

Collateral contract can be defined as a contract which is separate from the main contract. The consideration for the collateral contract is the making of the main contract. Thus by the definition of the collateral contract it can be inferred that for the establishment of a collateral contract it is essential to prove that the statement provided by the party for entering the main contract was promissory in nature, the promise was followed by a statement and that there was consistency between the collateral and the main contract. The case De Lassalle v Guildford can be illustrated as a good example in which a collateral contract existed. 

The next exception to the parole evidence rule is the doctrine of promissory estoppel.  Promissory estoppel can be defined as a doctrine which is equitable in nature and which prevents a party from going back on his promise which is not supported by consideration as held in the case of Hughes v Metropolitan Railway (1876-77) L.R. 2 App. Cas. 439. However to establish promissory estoppel  it is necessary to prove

• a pre contractual or legal relation existing between the parties as held in the case Combe v Combe [1951] 2 KB 215
• a clear and unambiguous promise given by the promisor as held in the case Woodhouse A.C. Israel Cocoa Ltd. v. Nigerian Product Marketing Co. Ltd. [1972] AC 741
• Change of position of the parties as held in the case of Alan v El Nasr [1972] 2 WLR 800
• Inequitable to let the promisor to go back on the promise as held in the case of D & C Builders v Rees [1966] 2 WLR 28

To identify whether a statement made during the negotiation of a contract is a term of the contract of a mere representation.  It is important to identify a statement as a term or a representation as such identification can determine the appropriate cause of action in case of breach of such statement. The factors to be taken into consideration while determining whether a statement is a term or representation are:

• Parole evidence rule- In case of written contracts the terms that are provided in writing will be considered to be the terms any verbal statements will be considered to be representations.
• Relative expertise- It can be stated that in circumstance in which the representor has greater knowledge any statement provided by him would be considered to be a contractual term as held in the case of Oscar Chess v Williams[1957] 1 WLR 370.
• Importance of reliance on the statement- If the representee indicates the representor the importance of the statement given by him such statement would be considered to be a term as held in the case Schawel v Reade [1913] 2 IR 81
• Timing- If a long time has passed between making the statement and the entering into the contract such statement would be considered to be a representation. 

Misrepresentation can e defined as a false statement of fact or law which has induced the misrepresentee to enter into the contract as held in the case of Bisset v Wilkinson  [1927] AC 177. However an opinion will not amount to actionable misrepresentation as held in the case of Smith v Land & House Property Corp (1884) 28 Ch D 7. Inducement or reliance on the part of the misrepresentee is an essential element of misrepresentation as held in the case Horsfall v Thomas [1862] 1 H&C 90.  Once misrepresentation has been established it is important to categorize the misrepresentation as:

• Fraudulent misrepresentation- In the case of Derry v Peek, it had been held that any statement made by a party knowing it to be false, without the belief in its truth , recklessly would not constitute fraudulent misrepresentation. The innocent party in case of fraudulent misrepresentation has the right to rescind the contract and claim damages
• Negligent Misrepresentation- Negligent misrepresentation is made by any person who gives a statement without the having reasonable grounds to believe the statement to be true as held in the case of Howard Marine v Ogden [1978] QB 574. In case of negligent misrepresentation the same penalty is imposed as fraudulent misrepresentation
• Wholly innocent misrepresentation- In case of innocent misrepresentation the representor has reasonable grounds to believe the statement given by him to be true.   An innocent party can neither rescind the contract nor claim damages.

It has also provided in section 18 of the Australian Consumer Law which has been provided in schedule 2 of the Competition and Consumer Act 2010 that any person who engages in trade or commerce must not indulge in misleading and deceptive conduct or any conduct which is likely to mislead or deceive any consumer. The definition of a consumer has been provided in section 3 of the ACL. Any person who consumes goods or services not amounting 40,000 dollars for household, domestic or personal purpose would be called a consumer.  

By analyzing the facts of the case, it can be stated that Mr Hardy had incorporated a restraint of trade clause in the contract of sale of Oliver Bar and Bistro. It was provided in the contract through the clause that subsequent to selling the Bar and the Bistro to Mr Laurel, Mr Hardy and his family members would be restricted from operating any tavern, bar, bistro or bottle shop within a radius of 10 kilometers of the same for a period of five years. Whether this restraint of trade clause can be considered to be valid can be analyzed by the application of the Vancouver Malt and Sake Brewing v Vancouver Breweries case. In this case it had been provided that a restraint of trade cause would be considered to be ineffective if it aimed to restrict or limit competition.  The restraint of trade clause in the contract between Mr. Laurel and Mr. Hardy aimed to restrict competition and thus would be ineffective. Further, it can be stated that the restraint of trade clause in the given scenario is not in the best interest of the parties or the public. 

In has been further provided that Mr Hardy was unwilling to sign the contract due to existence of the restraint of trade clause as he operated another liquor store within a radius of 10 kilometers. However it was assured by Mr. Laurel that he would not bring any action against Mr. Hardy. Mr. Hardy relied on such promise and signed the contract. Therefore, it can be stated that the parole evidence rule would not be applicable in the given scenario. Thus by the application of the Hughes v Metropolitan Railway case, it can be stated that the doctrine of promissory estoppel would be applicable in this scenario and this would restrict Mr Laurel to bring any action against Mr. Hardy.  Further it can be argued by Mr. Hardy that he entered into the contract due to the promise due to the promise made by Mr. Laurel and breach of this promise would result in the breach of the collateral contract by the application of the De Lassalle v Guildford case.

However as it has been provided by the facts of the case, it can be stated that Mr. Hardy had made misrepresentations about the financial prospects of the business of the Oliver Bar and Bistro as per the decision of the Bisset v Wilkinson. Further, it can be stated that that the misrepresentation in this case was fraudulent in nature as Mr. Hardy had knowledge about the true financial standings of the business, however he provided a false statement to Mr. Laurel. Thus by the application of the decision of the Derry v Peek case, it can be stated that Mr. Hardy can rescind the contract as well as claim damages from Laurel. The rights and guarantees as provided by the ACL would not be applicable in this scenario as Mr. Laurel cannot be termed a consumer s per the provisions of section 3 of the ACL.

Conclusion

Thus, in conclusion it can be stated that

• the restraint of trade clause will be ineffective
• the representations made by Mr Hardy constituted fraudulent misrepresentation
• Laurel will be entitled to rescind the contract as well as claim damages 

Reference List:

 Nordenfelt v Maxim, Nordenfelt Guns and Ammunition Co [1894] AC 535

Competition and Consumer Act 2010

Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242

Vancouver Malt and Sake Brewing v Vancouver Breweries [1934] AC 181

De Lassalle v Guildford

Hughes v Metropolitan Railway (1876-77) L.R. 2 App. Cas. 439

Combe v Combe [1951] 2 KB 215

Woodhouse A.C. Israel Cocoa Ltd. v. Nigerian Product Marketing Co. Ltd. [1972] AC 741                

Alan v El Nasr [1972] 2 WLR 800                                

D & C Builders v Rees [1966] 2 WLR 28

Oscar Chess v Williams [1957] 1 WLR 370.

Schawel v Reade [1913] 2 IR 81

Bisset v Wilkinson  [1927] AC 177

Horsfall v Thomas [1862] 1 H&C 90

Derry v Peek

Howard Marine v Ogden [1978] QB 574