Business Law: Restrictive Covenant Case Study and Analysis

This case study examines the enforceability of a restrictive covenant in a business context. The scenario involves Maddie, who purchased Clare's hairdressing salon and included a clause preventing Clare from operating any business in Adelaide for ten years. The analysis applies legal principles and relevant case law, including Nordenfeldt v Maxim Nordenfeldt Guns and Ammunition Company, to determine the reasonableness and validity of the covenant. The study considers whether the restraint is justified by legitimate business interests, such as protecting trade secrets or customer relationships, and assesses the duration of the restraint. The conclusion finds the covenant unenforceable due to its lack of connection to the hairdressing business and its excessive duration, referencing cases like Smith v Nomad Modular Building Pty Ltd and Seven Network (Operations) Limited v Warburton (No 2) to support this determination.

Running head: BUSINESS LAW
Business law
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1BUSINESS LAW
Legal area
The case study is related to the provisions of Restraint of trade clause or restrictive covenants.
Issue
In the given situation it has to be analyzed that whether the restrictive covenant which has been
imposed on Clare by Maddie can be enforced by law or not
Rule
Although restrictive covenant are used commonly they cannot be presumably be enforceable and
valid in law unless they are reasonable and have been incorporated to trigger legitimate interest
of the business. The concept had been ruled by the case of Nordenfeldt v Maxim Nordenfeldt
Guns and Ammunition Company [1894] AC 535.
The burden of proof lies on the parties which seeks to implement the restrictive covenant to show
that the clause dose not seek to provide more restraint that what is possibly required to protect
the legitimate interest of the business as provided by the case of Lindner v Murdock’s Garage
(1950) 83 CLR 628.
In the case of Stenhouse Australia v Phillips [1974] AC 391 it had been ruled that an employer
cannot incorporate a clause just to prevent the other from giving competition to the business.
The legitimate interest of the business which the courts would be satisfied towards making a
restrictive covenant includes the trade secrets and confidential information of the employer,
clients and customer of the employer and the staff of the employer.

2BUSINESS LAW
In the case of Smith v Nomad Modular Building Pty Ltd [2007] WASCA 169 it had been ruled
by the court that a restraint clause can be implemented for a period of six moths and in the case
of Seven Network (Operations) Limited v Warburton (No 2) [2011] NSWSC 386 for a period of
eight months. This signifies that the period of implementation must be reasonable and legitimate.
Application
In the given situation an agreement has to be entered upon by Maddie with Clare who has sold
her hair dressing saloon business to Maddiie. One of the clauses of the agreement provides that
she must not carry on any business in Adelaide for a period of 10 years. In order to analyze
whether the clause is reasonable or not the above discussed rules have to be applied.
Firstly the business which have been started by Clare is a cafe and has no connection with the
hear dressing business. There is no possibility of any threat which can be said to exits in relation
to the Hair dressing business which is owned by Maddie. It has been provided that few of the
saloon customers are also going to the café stared by Clare. However such an situation is causing
no harm to Maddie as both the business operations are totally different. Thus as per the above
discussed rules the restrictive covenant would not be legally enforceable as it is not for a
reasonable cause.
In addition the clause has been imposed for a period of 10 years. The various cases which have
been discussed in relation to restrictive covenants signify that they can at maximum be for a
period of 12 months. Thus the period of the clause is also unreasonable.
Conclusion
The clause imposed by Maddie on Clare is unenforceable

3BUSINESS LAW
References
Nordenfeldt v Maxim Nordenfeldt Guns and Ammunition Company [1894] AC 535.
Seven Network (Operations) Limited v Warburton (No 2) [2011] NSWSC 386
Smith v Nomad Modular Building Pty Ltd [2007] WASCA 169
Stenhouse Australia v Phillips [1974] AC 391