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

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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