John Orr Ltd v Orr

• Jurisdiction: Ireland
• Judge: Mr. Justice Costello
• Judgment Date: 01 January 1987
• Neutral Citation: [1986] IEHC 1
• Court: High Court
• Date: 01 January 1987

[1986] IEHC 1

THE HIGH COURT

JOHN ORR LTD v. ORR

BETWEEN:-

JOHN ORR. LTD., VESCOM B.V.

PLAINTIFFS

and

JOHN ORR

DEFENDANT

Citations:

AMERICAN CYANAMID CO V ETHICON LTD 1975 AC 396

Synopsis:

INJUNCTION

Interlocutory

Preliminary issue - Restraint of trade - Validity of restraint clause in service agreement - Circumstances requiring determination of issue of validity of clause - ~See~ Trade, restraint - (1986/3544 P - Costello J. - 4/7/86) - [1987] ILRM 702

|Orr Ltd. v. Orr|

TRADE

Restraint

Reasonableness - Service agreement - Restraint clause - Enforcement - Severance - Interlocutory injunction - Preliminary issue - In 1977 Orr Ltd. manufactured garment and upholstery fabrics in Ireland but was in financial difficulties - On 11/3/77 Vescom B.V. purchased the issued shares of Orr Ltd. under a share-transfer agreement to which the defendant was a party - By that agreement the defendant agreed to enter into a service agreement with Orr Ltd. for the purpose of being appointed as commercial manager of that company - By the share-transfer agreement the defendant contracted that, during the year after the termination of his service agreement, he would not have an interest in or act as agent for any company or firm which manufactured or marketed similar goods to those marketed by Orr Ltd. or by Vescom B.V. - By the share-transfer agreement the defendant also contracted that, during that year, he would not solicit or seek to obtain orders from or entice away any person or company which, within the year preceding such termination, was a customer of Orr Ltd. or of Vescom B.V. or any associated or subsidiary company - The defendant duly entered into the service agreement with Orr Ltd. and therein contracted in the same terms in relation to the period of one year after the termination of the service agreement - The defendant's service agreement terminated on 30/10/85 and thereupon he acted in breach of his said contracts in restraint of trade - The plaintiff companies issued their summons on 12/5/86 and applied for an interlocutory injunction to prevent the defendant from continuing to act in breach of his contracts - Held that, in view of the imminence of the end of the restraint period, the court would determine, as a preliminary issue, the validity of the restraint clauses in the said agreements - Held that the issue of the reasonableness of the restraint clauses must be determined on the basis of the circumstances in 1977, when Orr Ltd. were exporting their goods to North America and to Europe but were not making, or intending to make, goods similar to those made by Vescom B.V. - Held that the enticement clauses were reasonably necessary for the protection of the interests of each plaintiff with the exception of the phrase "or Vescom or any associated or subsidiary company", which phrase should be treated as severed from those clauses - Held that the competition clauses were unreasonably restrictive in so far as they sought to prevent the defendant from competing with Vescom B.V., and in so far as they imposed a world-wide prohibition on competition with Orr Ltd. - Plaintiffs granted interlocutory injunction in terms of enticement clauses subject to the said exception - (1986/3544 P - Costello J. - 4/7/86) - [1987] ILRM 702

|Orr Ltd. v. Orr|

1 Judgment of Mr. Justice Costello delivered the 4th day of July 1986 Mary P O'Donoghue Registrar

2 The plaintiffs are suing on foot of restraint of trade clauses in two agreements executed on the 11th March 1977, one being a sale by the defendant to Vescom B.V. (the second-named plaintiff herein) of his shares in John Orr Ltd. (the first named plaintiff herein) and the other being a service agreement which he entered into with John Orr Ltd. Having instituted these proceedings the plaintiffs on the 12th May last applied for an interlocutory injunction to restrain breaches of these clauses. It quickly became clear that the main issue between the parties was whether the restraint clauses were enforceable and I decided to try this point as a preliminary issue and fixed the 19th June for hearing oral evidence and submission on it, and adjourned the motion until the enforceability issue had been determined. I adopted this course because of the possibility that an injustice might result from the application to the special facts of this case of the principles on which interlocutory relief is usually granted or refused, principles which are, of course, different from those applicable when a trial on the merits has taken place. The restraints imposed by the agreement were of one years duration and will expire on the 31st October next. As in all probability the trial could not take place until after that date, a finding by the trial judge that the restraints were enforceable would not enable the plaintiffs to obtain the injunction to which his judgment would entitle them. In the meantime, interlocutory relief might have been refused. This undesirable possibility could be avoided, it seemed to me, by adopting the procedures I have just outlined.

3 The principles of law to be applied in the issue are not in controversy and can be briefly stated. All restraints of trade in the absence of special justifying circumstances are contrary to public policy and are therefore void. A restraint may be justified if it is reasonable in the interests of the contracting parties and in the interests of the public. The onus of showing that a restraint is reasonable between the parties rests on the person alleging that it is so. Greater freedom of contract is allowable in a covenant entered into between the seller and the buyer of a business than in the case of one entered into between an employer and employee. A covenant against competition entered into by the seller of a business which is reasonably necessary to protect the business sold is valid and enforceable. A covenant by an employee not to compete may also be valid and enforceable if it is reasonably necessary to protect some proprietary interest of the covenantee such as may exist in a trade connection or trade secrets. The courts may in certain circumstances enforce a covenant in restraint of trade even though taken as a whole the covenant exceeds what is reasonable, by the severance of the void parts from the valid parts.

4 The facts established at the hearing are as follows. John Orr Ltd. was established by the defendant in 1971 and carried on a business in Navan, County Meath, manufacturing and selling upholstery fabrics and garment fabrics. It had two members, the defendant and a Mr. Jerry Linscheid. In the early part of 1977 it was failing badly - indeed it was insolvent. In an endeavour to revitalise the company (an attempt which in the event proved eminently successful) an agreement was entered into on the 11th March of that year (the "share-transfer agreement") by which Vescom B.V. (a company registered in Holland) would purchase the business of John Orr Ltd. and invest £50,000 in it. It did this by purchasing the shares in the company owned by the defendant and Mr. Linscheid for a nominal sum. As part of the financial package then negotiated the Industrial Development Authority agreed to make grants to the company, Foir Teoranta agreed to make available certain financial facilities, and certain major creditors agreed to write off their debts. As a result of this agreement John Orr Ltd. became a wholly owned subsidary of Vescom B.V. The share transfer agreement also contained provisions for the future role of the defendant and Mr. Linscheid in John Orr Ltd., requiring both to enter into service agreements with the company by which the defendant would...