Enforceability of Restrain Covenants in Sale and Purchase Contracts and Violation of Implied Guarantees under Australian Consumer Law

This article discusses the enforceability of restrain covenants in sale and purchase contracts and violation of implied guarantees under Australian Consumer Law. It covers the laws, issues, and applications related to these topics. The article also provides case laws and references for further reading.

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Contents
Solution 1....................................................................................................................................................2
Issue........................................................................................................................................................2
Law..........................................................................................................................................................2
Application..............................................................................................................................................3
Conclusion...............................................................................................................................................4
Solution 2....................................................................................................................................................4
Issue........................................................................................................................................................4
Law..........................................................................................................................................................5
Application..............................................................................................................................................6
Conclusion...............................................................................................................................................7
Reference List.............................................................................................................................................8

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Solution 1
Issue
Can lee enforce the covenant clause against Lee?
Law
Every contractual party is obligated in law to comply with the contractual terms of a legally
enforceable contract that are made by them by complying with all the contractual elements.
There are numerous kinds of terms that are made part of the contract. However, one term that is
normally found part of sale and purchase contracts is Restrain covenants. (Duncan 2012)
Restrain covenants are the terms that are made part of the contract by both the parties to the
contract and thus are binding on the parties. The main aim of the restrain covenants is to put limit
on one of the parties to contract to carry to the same trade with which he is associated with at any
other place for certain duration of time and is held in General Billposting Company Ltd v
Atkinson [1909] AC 118. This restrain trade is normally found in employment contracts or sale
of business contracts where the buying party or the employer wants to restrain the seller or the
employee to carry on the similar trade for certain duration and is held in Write v Gasweld (1991).
The main reasons that are attributed which authenticate the applicability of the restrain clauses
are: (Gibson & Fraser 2013)
i. To protect the goodwill – At times it becomes very necessary that to protect the good
will of the employer restrains must be put on the employee. If the employee or the
seller of the business is allowed to carry on the similar business then it may hamper
the goodwill of the employee or the buyer of the business as the employee/seller
might use the name of the business and thus hamper the market value of the business
and is held in the leading case of Stenhouse Australia v Phillips (1974).
ii. To protect the legitimate interest – The employer wants to safeguard his legitimate
interest which might get hamper of the employee is permitted to carry on the
business. The court must look into the fact whether the legitimate interest is hampered
or not. If no legitimate intents is hampered then the restrain covenant is found to be
inoperative and is held in the leading case of Woolworths Limited V Mark Konrad
Olson (2014).

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iii. To avoid unnecessary competition for a limited period of time – If a limited restrain is
not imposed then there are chances that the employee will hamper the business of the
employer as he is aware of al the in and outs of the business and no opportunity is
given to the employer to change his business strategies which is already in the notion
of the ex employee and is held in the leading case of AGA Assistance Australia Pty
Ltd v Tokody (2012).
iv. To avoid any kind of solicitation – the employees are fully aware of all the client,
data base of the business and there are full chances that the ex employee or the seller
of the busies might use their contacts and solicit the clients or the data base or the
current employees of the business for their own benefit. In order to avoid the same it
is necessary that restrain must be put.
v. To protect the confidential information of the company it is necessary that restrain
clauses must be imposed. The employee is in the knowledge of the trade secrets or the
seller of the business is already aware of all the trade secrets of the business, thus, in
order to protect the business so that the ex owner dos not hamper the trade secrets and
to maintain the confidentiality, the applicability of restrain clauses are justified.
If a restrain clause is found to be accurate, then, it is binding on the parties.
Normally, a restrain clause complying with the above conditions are considered to be valid. But
a restrain clause must be imposed on the party to carry on the similar business only: (Brown
2016)
i. For a limited period of time – It is submitted in Smith v Nomad Modular Building Pty
Ltd (2007) that the restrain must only for limited periods and prolonged restrain is
invalid in law. In Pearson v HRX Holdings Pty Ltd (2012) a restrain of 2 years was
found to be enforceable.
ii. To a limited geographical area – also, the restrain must be for particular region and
excessive restrain is not permissible (Seven Network (Operations) Limited v
Warburton (No 2) (2011).
Application
Peter and Lee were dealers in the imitation jeweler. Lee sold her business to Peter. One of the
terms that are agreed by the parties was that Peter after the sale of the business would not carry

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in or be engaged in the sale, importation, manufacture of real state or imitation jeweler anywhere
in Australia for a period of 2 years.
Thus, a restrain covenant was made part of the contract by both Peter and lee. It is submitted that
the clause that was made part of the contract is considered to be valid and binding because:
i. The same is needed to protect the confidentiality of the business. since both peter and
Lee is part of the same business thus there are chances that lee might try to take the
data base and trade secrets of the business;
ii. Also, lee might solicit the employee of the business and thus it is necessity that the
restrain clause must be imposed;
iii. If a similar business is carried on by Lee then it might hamper the competition and
might not be in the legitimate interest of the business.
Thus, considering the facts, it is justified that the restrain clause by Peter is valid.
However, after one year of selling of the business, lee established a retail selling business of the
imitation jeweler in Cairns.
It is submitted that a restrain of 2 years is imposed on Lee by peter and as per Pearson v HRX
Holdings Pty Ltd, this kind of restrain is permissible.
However, Lee was also restrained to carry on the business throughout Australia. Now, this
restrain is not permissible as it will be too value and too much to be imposed on Lee.
Conclusion
It is thus concluded that the restrain clause is practically allowed and Lee must not carry similar
business for 2 years but not throughout Australia. But, lee carry on the business after one year of
the sale of business. So, lee has violated the clause partially and thus peter can sue Lee for the
same.
Solution 2
Issue
Whether Richard can claim anything against the owner of the chip chop shop under the
Australian Consumer law?

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Law
The Australian Consumer law is a law that is framed to provide safeguard to the consumers.
Every consumer who is purchasing good for a value of less than $40,000 has the right to avail
the implied guarantees that are made part of the Australian consumer law against the
manufacturers provided the goods that are bought are for domestic or personal use.
The definition of manufacturer also includes suppliers as per section 7 of the Act,. Thus, the
implied guarantees are not only imposed on the manufacturers of the goods but also giant the
supplier of such goods.
There various implied guarantees that are imposed on the suppliers of the goods include: (Gillies,
2004)
i. As per section 54 of the ACL submits that the goods that are purchased by a
consumer from the supplier must be of acceptable quality, safe and durable. The
goods are of acceptable quality if the goods are not misconceived to its nature ,
origin, style, etc. also, the goods so supplied must ne such that it is safe and durable
and is held in the leaden case of Grant v Australian Knitting Mills (1936);
ii. As per section 55 of the ACL, if the consumer has specified the reason for the
purchase of the goods then it is implied guarantee upon the supplier that the goods
that are actually sold by him to the buyer or consumer shook fit the purpose for which
it is acquired and is held in the leading case of McWilliams Wines Ltd v Liaweena
(NSW) Pty Ltd (1988).
iii. As per section 56 of the ACL. If the supplier has sold the goods on the basis of any
description then the goods that are actually sold by the supplier must correspond to
such description and is held in the leading case of Ferraro v DBN Holdings Aust Pty
Ltd T/As Sports Auto Group (2015).
Now, if the implied guarantee are violated, them, the supplier must face the consequences
depending upon the kind of breach that is incurred, that is,;
i. Major breach – if the breach is major then the contract can be canceled, money can be
refunded and compensation can be sought.
ii. Minor breach - only damages can be claimed.

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Application
As per the facts, Richard went to a fish and chip chop shop. He asked for two fresh lobsters for
dinner. The owner explained that she does not have live lobsters. However she had some boiled
ones. The same are sold to Richards. The lobsters were not fresh and after eating them Richard
fell ill.
Now, Richard has purchased lpbsters from Chip shop.
It is assumed that the value of the lobster is less than $40,000, thus, the provisions of the ACL is
applicable on the transaction that is exchanged amid Richard and Chip Chop shop as per section
3 of the Act. it is also submitted that Richard has purchased the lobster for dinner and thus fior
personal consumption, hence, Richard is a consumer as per section 3 of the Act.
Now, though chip chop shop is not the manufacturer but is the spooler of the lobster and thus as
per section 7 of ACL, he must be consider as a person upon whom the implied guarantees of the
ACL will apply.
Now, there are several implied guarantees that are violated by the chip chop shop.
It is submitted that section 54 of the ACL is violate by the chip chop shop as the lobsters that are
sold by the chip chop ship to Richard are not live lobsters but are boiled lobsters. Also, the
quality of the lobsters was not good as because of the consumption of the lobsters, Richard fell
ill. Thus, the quality of the lobsters is not acceptable.
Also, when the lobsters were sold by chip chop shop then Richard made it very clear that the
lobster is purchased by him to be used for dinner, but, the lobster that is old by chip chop shop is
not fit for the purpose for which it is purchased, that risk, the lobster is not fit for the
consumption in dinner and thus there is clear breach of section 55 of the ACL.
Also, section 56 of ACL is also violated by the chip chop shop as the shop has made a
description that it does not have a live lobster but it has boiled lobster and the same is also good
for consumption, however, the same is not true. Thus, the goods that are actually sold do not
match with the description of the goods that is the lobster.

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So, there is clear violation of several implied guarantees and thus Richard can the chip chop
shop.
So, major failures are incurred by the chip chop shop as the quality is not acceptable, the goods
are not fit for consumption and is not of safe quality so that the same can be consumed. So, she
can cancel the contract and seek refund of money and compensation from the shop.
Conclusion
Thus, there are several implied guarantees that are violated by the chip chop shop and the
violations are considered to be major failures on the part of the chip shop.
Thus, Richard can sue the chip chop shop for the violation of implied warranties and can sue the
chop for compensation ad injuries that are sustained to him.

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Reference List
Books/Articles/journals
Brown , M 2016, ‘A global guide to ‘restrictive covenants’.
Gibson, A & Fraser, D 2013, ‘Business Law 2014’, Pearson Education Australia, 2013.
Duncan, WD 2012, Joint Ventures Law in Australia’, 3rd Edition, Federation Press..
Case Laws
AGA Assistance Australia Pty Ltd v Tokody (2012).
Ferraro v DBN Holdings Aust Pty Ltd T/As Sports Auto Group (2015).
Grant v Australian Knitting Mills (1936);
General Billposting Company Ltd v Atkinson [1909] AC 118.
Pearson v HRX Holdings Pty Ltd (2012).
McWilliams Wines Ltd v Liaweena (NSW) Pty Ltd (1988)
Seven Network (Operations) Limited v Warburton (No 2) (2011).
Stenhouse Australia v Phillips (1974).
Smith v Nomad Modular Building Pty Ltd (2007).
Write v Gasweld (1991).
Woolworths Limited V Mark Konrad Olson (2014).