Nekrews v PMAC Scientific Ltd
| Jurisdiction | Scotland |
| Judge | Sheriff Principal DCW Pyle |
| Judgment Date | 19 November 2018 |
| Docket Number | No 3 |
| Court | Sheriff Appeal Court |
| Date | 19 November 2018 |
[2018] SAC (Civ) 29
Sheriff Principal DCW Pyle
British Motor Trade Association v Gray 1951 SC 586; 1951 SLT 247
Dickson v Pharmaceutical Society of Great Britain [1970] AC 403; [1968] 3 WLR 286; [1968] 2 All ER 686
Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269; [1967] 2 WLR 871; [1967] 1 All ER 699
Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1957] 1 WLR 1012; [1957] 3 All ER 158; [1957] RPC 431
Mineral Water Bottle Exchange and Trade Protection Society v Booth (1887) 36 Ch D 465
Morris (Herbert) Ltd v Saxelby [1916] 1 AC 688
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535
Thompson v New South Wales Branch of the British Medical Association [1924] AC 764; 40 TLR 506
Contract — Breach of contract — Covenant to procure associates non-competition — Whether a restraint of trade
John Anthony Nekrews and Caroline Nekrews raised an action for payment in the sheriffdom of Grampian, Highland and Islands at Aberdeen. The defender counterclaimed in respect of damages for alleged breach of contract. After debate before the sheriff, the pursuers appealed to the Sheriff Appeal Court.
The parties entered into a share purchase agreement. The vendors sued the purchaser for payment of the unpaid price. The purchaser averred that payment was no longer due because the vendors were in breach of contract, and counterclaimed for damages. By virtue of cl 9 of the parties' contract, the vendors covenanted with the respondent that they “shall procure that no Associate of theirs shall” undertake certain specified activities during specified periods in competition with the purchaser. The purchaser averred that the vendors were in breach of cl 9 by failing to procure that one of the vendor's brothers, by means of a limited liability company, would not undertake activities of the kind thereby proscribed.
The vendors argued that cl 9 was unenforceable as being in restraint of trade and the purchaser had not averred that the provisions were otherwise reasonable.
The purchaser argued that there was no restraint of trade as any associate of the vendors was free to ignore attempts by them to procure his co-operation, and the only consequences of any failure would fall upon the vendors themselves.
Held that: (1) the restraint of trade was a concept which applied in the context of a party entering into an agreement whereby he surrendered his unrestricted liberty to trade freely, contrary to the public interest, by depriving the community of a person's skill and experience (para 6); (2) an agreement to secure the co-operation of third parties did not entail any surrender of liberty and, accordingly, did not engage the concept of restraint of trade according to law (para 7); and appeal refused.
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 and British Motor Trade Association v Gray1951 SC 586applied.
The cause called before the Sheriff Appeal Court, comprising Sheriff Principal DCW Pyle, for a hearing, on 23 October 2018.
At advising, on 19 November 2018, the opinion of the Court was delivered by Sheriff Principal DCW Pyle—
Opinion of the Court— [1] In June 2016, the parties entered into a share purchase agreement whereby the respondent purchased the issued share capital of Gamm@Chek International Ltd, a company which specialised in flood member detection services to the oil industry. The contract provided for payment of elements of the purchase price at varying times and on varying conditions being met. The initial element of the price was paid on completion. The next element, referred to as ‘the Secondary Consideration’, was not paid when due. In this action the appellants demand payment of that sum. In response, the respondent avers that payment is no longer due because the appellants are in breach of contract. The respondent counterclaims for damages arising from the alleged breach.
[2] Clause 9.1 of the contract is in the following terms:
‘Both of the [appellants] covenant with the [respondent] that they … shall procure that no Associate of theirs shall:
(a) at any time during the period of 3 years beginning with the Completion Date, in any geographic area in which any business of the Company was carried on at the Completion Date, carry on or be employed, engaged or interested in any business which would be in competition with any part of the Business as the Business was carried on at the Completion Date; or
(b) at any time during the period of 3 years beginning with the Completion Date, deal with any person who is at the Completion Date, or who had been at any time during the period of 36 months immediately preceding that date, a client or customer of the Company; or
(c) at any time during the period of 3 years beginning with the Completion Date, canvass, solicit or otherwise seek the custom of any person who is at the Completion Date, or who has been at any time during the period of 36 months immediately preceding that date, a client or customer of the Company;
(d) at any time during the period of 3 years beginning with the Completion Date:
(i) offer employment to, enter into a contract for the services of, or attempt to entice away from the Company, any individual who is at the time of the offer or attempt, and was at the Completion Date, employed or directly or indirectly engaged with the Company; or
(ii) procure or facilitate the making of any such offer or attempt by any other person.’
Clause 1.1 of the contract provides that the term ‘Associate’ means in relation to a person, a person who is connected with that person, and whether a person is so connected is to be determined in accordance with sec 993 of the Income Tax Act 2007 (cap 3). Section 993(2) provides:
‘An individual (“A”) is connected with another individual (“B”) if–
(a) A is B's spouse or civil partner,
(b) A is a relative of B,
(c) A is the spouse or civil partner of a relative of B,
(d) A is a relative of B's spouse or civil partner, or
(e) A is the spouse or civil partner of a relative of B's spouse or civil partner.’
Section 994(1) provides: ‘In section 993 … “relative” means brother, sister, ancestor or lineal descendent’.
[3] The respondent avers that a Mr Nekrews, by means of a limited liability company in which he owns 50 per cent of its shares,...
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