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

Whether restraint of trade clauses are unlawful.

Facts:

The appellant, Thorsten Nordenfelt, was a Swedish gun manufacturer with a valuable, world-wide business. He sold the business to a company, the respondents, and agreed to enter into a restrictive covenant not to work for any rival business for a 25 year period in an unlimited geographical area. Later, he worked for a rival business. The respondents brought an action to enforce the covenant by inunction. The case came to the House of Lords.    

Issues:

The appellant argued that clause was a restraint of trade clause and had to be reasonable to be upheld. He argued that a worldwide geographical limitation was unreasonable.  The respondents argued that the restraint was only such as was necessary to protect themselves.

Held:

Lord McNaughton said a clause by which someone restrains themselves from the exercise of his trade was prima facie unlawful. It was a principal of English law all trade should be free. However, it would discourage trade if someone who has built up a valuable business could not dispose of it to his best advantage. Therefore, restraint of trade clauses would be upheld if they were reasonable (at 564):

“in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.”

It was not disputed that this particular clause was reasonable, as a huge sum had been paid for the business. Nor was it injurious to the public. Therefore, the clause was upheld.


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