In Quantum Actuarial LLP -v- Quantum Advisory Ltd [2021] EWCA Civ 227, the Court of Appeal considered the application of the doctrine of restraint of trade in respect of restrictive covenants contained in a services agreement between commercial parties.

Background to the claim

In November 2007, Quantum Actuarial LLP (LLP) and Quantum Advisory Ltd (Quad1) entered into a services agreement (Agreement). Thereafter, the Agreement was novated to the respondent (Quad2).

The Agreement contained various restrictive covenants (the Covenants) seeking to prevent LLP from:

  • Soliciting or enticing any of Quad1’s clients in respect of defined services
  • Obtaining instructions from or undertaking defined services on behalf of any of those clients
  • Undertaking of any services in relation to 'pipeline' business or in relation to new business introduced before 31 March 2008

The duration of the Covenants was the length of the Agreement (99 years) plus 12 months.

In June 2018, LLP sent a letter to Quad2 stating that it intended, as from 1 September 2018, to proceed on the basis that the Covenants were in unreasonable restraint of trade and, as such, were unenforceable. Quad2 indicated that the term of the Agreement ought to be treated as amended to a period of time “deemed reasonable” and that meant LLP was “free to contract with whoever it wishes without any restraint”.

In July 2018, Quad2 commenced proceedings seeking, among other things, declaratory relief to establish that the Agreement was fully enforceable between the parties. LLP counterclaimed, seeking declaratory relief that the Covenants were in unreasonable restraint of trade. Quad2 sought and obtained an injunction in August 2018.

The doctrine of restraint of trade

Generally, restrictive covenants are unenforceable unless they are reasonable with reference to the interests of the parties concerned and of the public (the Doctrine).

However, certain covenants are part of the 'accepted machinery' of certain transactions, meaning they are part of the structure of a trading society and should not be treated as restrictive (the 'trading society test'; Peninsula Securities Ltd -v- Dunnes Stores (Bangor) Ltd [2020] UKSC 36).

Decision of the High Court

HHJ Keyser QC held that the Doctrine did not apply to the Covenants because, among other reasons, the Agreement was bespoke. The Agreement was essential to LLP’s ability to trade (and so rather than being a restraint of trade, it provided an opportunity to trade) and the evidence indicated that it was always intended that the Covenants should last for the full term of the Agreement and 12 months thereafter.

Even if the Doctrine did apply, the judge held that the Covenants would have been reasonable. Key factors in the Court’s decision included:

  • The Covenants were a matter of free agreement between experienced, intelligent, articulate and highly competent people. They expressly agreed that the restraints were reasonable as being necessary to protect the parties’ interests.
  • There was no real substance to LLP’s argument that there was an inequality of bargaining power between the parties; it was not a case of one naïve and inexperienced party facing a commercially sophisticated counterparty.
  • The absence of independent legal advice on behalf of LLP was not a reason to view the parties’ free agreement with caution. The Agreement recorded that each party had taken legal advice 'if required'.
  • An alleged inadequacy or unfairness in fees payable to LLP did not indicate unreasonableness in the Covenants; they were considered fair and reasonable at the time the Agreement was entered into.
  • The 100-year duration was not arbitrarily long when viewed in its proper context, especially when the clients included pension funds and other organisations that might subsist for more than a century.
  • The Covenants were not unreasonable on account of any public policy considerations.

LLP appealed the decision on both grounds.

Decision of the Court of Appeal

The Court of Appeal dismissed the appeal. In summarising the relevant legal principles, the Court of Appeal held that the Doctrine is not limited to any particular type of contract and there is “no precise or exhaustive test” (including the trading society test) to be applied. Rather, if a restraint within a commercial contract does not fall within a category of accepted and normal commercial dealings, the Court must consider all relevant factors, weighed up on a cumulative basis, to ascertain whether the agreement “…can be said to be such a cause for concern (or apparently oppressive) as to justify (as a matter of public policy) requiring the covenantee to prove reasonableness”. The practical effect of the restraint was key, rather than “legal niceties or theoretical possibilities”.

The party seeking to rely on the restraint must establish reasonableness by showing that the restraint goes no further than is reasonably required in order to protect their legitimate interests. Then, it is for the party opposing the restraint to prove that it is contrary to the public interest. Relevant factors include the character of the business, any inequality of bargaining power, any standard forms of contract, when the restraints operate, the surrounding circumstances, the duration of the agreement and the level of compensation. These are to be judged at the time the contract was entered into.

Here, the Agreement was bespoke to the “very specific circumstances…fashioned to address the competing needs and interests of a group of professional people and, in particular, the practical issues involved in permitting one part of the group to enjoy the benefits of [an] established…brand and business when [they were] unable to afford a buy-out of the interests of the other group”. That meant that the Agreement was fair and reasonable to all those involved and the Doctrine did not apply.

If the Doctrine did apply, the Covenants were unobjectionable. The duration did not give rise to any legitimate cause for concern. The Covenants were key to the deal between the parties; in fact, LLP would not have come into existence at all but for Agreement. There was no inequality of bargaining power or any other factors to justify imposing the Doctrine. There was no evidence to suggest that the Agreement impacted adversely on the public interest and the Doctrine does not otherwise exist “to rescue business men and women from having entered into agreement which they may later regret”.

Comment

The decision confirms that the court will consider the contractual relationship as a whole and focus on the practical consequences of the restraint in question. The court will champion freedom to trade in appropriate cases, but the 'freedom to contract' (ie the court upholding agreements freely entered into) is an important policy consideration in its own right.