Nordenfelt v The Maxim Nordenfelt Guns & Ammunition Co Ltd

[1894] AC 535

 

Facts

Nordenfelt had a machine gun manufacturing business. He (effectively) sold the business the Maxim Nordenfelt. He entered into a restrictive covenant by which he could not engage in the trade of manufacturing guns, explosives or ammunition or engage in any competing business for a period of 25 years. Nordenfelt later entered into an agreement with another gun company

 

Decision

History of Restraint of Trade

In the age of Queen Elizabeth 1st all ROT's were void as contrary to public policy. This was relaxed to focus only on general restraints.

Present

The current (1894) view is that:

General rule: ‘All interference with individual liberty of action in trading, and all restraints of trade themselves, if there is nothing more, are contrary to public policy and therefore void’ – as a general rule

Exceptions: if justified because it is reasonable having regard to interests of the parties and the public – generally ‘area of restriction should correspond with the area in which protection is required’

Applied in this case

The restraint was reasonable in the interests of the parties
Nordenfelt obtained full value for his sale

The restraint was reasonable in the public interest
No injury in fact that person is ‘prevented from carrying on a trade in weapons of war abroad’. Also no injury in fact that N can no longer earn a living
Macnaghton LJ could not conceive of how anyone could get rid of £200,000 so thought it far-fetched to suggest he might become a public burden.

Quote

“… in the present case it was hardly disputed that the restraint was reasonable, having regard to the interests of the parties at the time when the transaction was entered into.  It enabled Mr. Nordenfelt to obtain the full value of what he had to sell; without it the purchasers could not have been protected in the possession of what they wished to buy.  Was it reasonable in the interests of the public?  It can hardly be injurious to the public, that is, the British public, to prevent a person from carrying on a trade in weapons of war abroad.  But apart from that special feature in the present case, how can the public be injured by the transfer of a business from one hand to another?  If a business is profitable there will be no lack of persons ready to carry it on.  In this particular case the purchasers brought in fresh capital, and had at least the opportunity of retaining Mr. Nordenfelt's services.  But then it was said that there is another way in which the public may be injured.  Mr. Nordenfelt has "committed industrial suicide," and as he can no longer earn his living at the trade which he has made peculiarly his own, he may be brought to want and become a burden to the public.  My Lords, this seems to me very far-fetched.  Mr. Nordenfelt received over £200,000 for what he sold.  He may have got rid of the money.  I do not know how that is.  But even so, I would answer the argument in the words of Tindal C.J.: "If the contract is a reasonable one at the time it is entered into we are not bound to look out for improbable and extravagant contingencies in order to make it void": Rannie v. Irvine.” (emphasis added)