The issue of whether the restraint of trade doctrine applied to restrictive covenants in a services agreement entered into in connection with a restructuring and joint venture has recently come before the High Court. The court considered two related issues. First, whether the restraints in questions fell within the restraint of trade doctrine (the scope issue) and, secondly, if they did, whether they were reasonable (the reasonableness issue).

Background

Scope of the doctrine: There is a line between contracts that fall within the restraint of trade doctrine, and ordinary contracts that regulate the commercial dealings of parties, even though the latter will usually involve some necessary restraint on the freedom of trade of one or both of the parties. The two main categories of contract to which the doctrine of restraint of trade has been applied are those between employer and employee and those between seller and buyer of a company or business. However, the courts have also made clear that the categories of restraint of trade are not closed. For example, the Court of Appeal has held that the doctrine is capable of applying to joint ventures (Dawnay, Day & Co v. de Braconier d'Alphen [1998] ICR 1068).

The reasonableness issue: Where the restraint of trade doctrine applies, whether the restraint in issue is justified, and therefore enforceable, is determined by reference to whether it is reasonable by reference to both the interests of the parties concerned and the interests of the public. While the courts will usually proceed on the basis that contracting parties are the best judges of their own interests, matters such as the duration of the restraint, any inequality of bargaining power and the consideration received by the party being restrained can be relevant to the issue of reasonableness.

Facts

The case concerned a restructuring that took place in late 2007/2008 involving three connected businesses providing actuarial and pensions advisory services (the legacy group).

By 2007, two matters regarding the legacy group needed addressing. First, it had for some years been the intention to merge the businesses of two of the legacy group. Second, however, the interests and ambitions of those involved in the legacy group had begun to diverge. In particular, while one key shareholder (MC) wanted to diversify, the other directors and shareholders wanted to focus on developing the existing business. For this and other reasons, it was agreed that there would be a reorganisation of the businesses, but the size of MC's interest in the legacy group was such as to make it unaffordable for the others to buy him out.

To get round these problems, a structure was devised by which the legacy group would retain its goodwill and existing client base (the legacy clients), but the legacy clients would be serviced on behalf of the legacy group by a new entity (the LLP). The legacy clients would be invoiced by, and pay, a legacy company and the LLP would, in turn, invoice the legacy company a fixed percentage of the amounts it had invoiced to the legacy clients. This was designed to cover the LLPs costs but not provide it with a profit. However, the LLP would be free to develop business with new clients. The legacy group would continue with its merger and diversification plans.

These arrangements were documented by way of an agreement described as a services agreement. The services agreement included restrictive covenants on the part of the LLP not to solicit, or attempt to solicit, or obtain instructions from or undertake any services for any legacy clients or persons that the legacy group had identified as potential clients. The covenants were expressed to last for the lifetime of the agreement (99 years) plus 12 months after its expiry or termination, i.e. a total of 100 years subject to early termination (though the LLP had very limited ability to extricate itself from the services agreement early). The covenants were acknowledged in the agreement to be no more than extensive than was reasonable to protect the legacy group's interests.

Over time, the LLP became dissatisfied with the terms of the services agreement, in particular the fee allocation. The LLP argued (among other matters) that the restrictive covenants amounted to an unreasonable restraint of trade. That led the legacy group to bring proceedings, seeking a declaration that the services agreement was binding on the parties and an injunction to restrain the LLP from acting in breach.

Decision

The court stressed that the services agreement was a bespoke agreement and needed to be considered on its own terms and in its own circumstances. That said, the court concluded that the services agreement fell outside the scope of the restraint of trade doctrine for a group of related considerations. In particular:

• The LLP was brought into existence for the purpose of the restructuring that was effected via the services agreement. It had no prior being or business and no other rationale. In the circumstances, therefore, the complaint that the LLP's trade was restrained by the services agreement lacked "the kind of traction" that is normally found where the doctrine applies.
• Without the services agreement, the LLP would not have been able to trade. The services agreement was therefore not, in any relevant sense, a restraint of trade but rather a means of providing the opportunity to trade. It facilitated rather than stifled trade.
• The underlying purpose of the restraints in the restrictive covenants was to give effect to the "ownership boundaries" established by the arrangements. They reflected the fact that, while the LLP had the benefit of servicing the legacy group's business for the lengthy period it wanted, it had not acquired that business for itself and was not entitled to use its favourable position under the services agreement to help it to do so.

The court went on to say that, even if the restraint of trade doctrine had applied, it would have found it to be reasonable. In particular:

• The services agreement was a matter of free agreement between experienced business people, who were properly able to look after their own interests and who expressly agreed that the restrictive covenants were reasonable to protect the parties' interests.
• The court dismissed the LLP's arguments based on inequality of bargaining power, lack of independent legal advice, inadequacy of consideration and the length of the restrictive covenants. Given the relevant facts and the nature of the arrangements between the parties, these factors did not render the restrictions unreasonable.
• There were no considerations of public policy that made the restraints unreasonable.

Comment

The issues of whether a commercial agreement falls within the restraint of trade doctrine and/or whether any restraint is reasonable will always be fact specific and be determined on a case-by-case basis.

However, the case is a useful window on the principles that a court will apply to the issues. It demonstrates that it is possible for even a long restrictive covenant to fall outside the restraint of trade doctrine where the restriction is central to the commercial arrangements between the parties and that such a restriction may also, in the right circumstances, be reasonable.

Quantum Advisory Ltd v. Quantum Actuarial LLP [2020] EWHC 1072