A Restrictive Interpretation?

• Published date: 30 June 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Contracts and Commercial Law, Arbitration & Dispute Resolution, Trials & Appeals & Compensation
• Law Firm: Tanfield Chambers
• Author: Mr Andrew Butler

Andrew Butler QC assesses the recent Court of Appeal decision in Quantum Actuarial LLP v Quantum Advisory Ltd [2021] EWCA Civ 227, in which he appeared for the Appellant. The case concerned covenants in restraint of trade, arising in an unusual context.

Introduction - the Legal Landscape

Covenants in restraint of trade present, in the words of the editors of Chitty on Contracts, "peculiar conceptual difficulty". It is well known that such covenants may attract the application of the Nordenfelt test - namely, they must be no wider than is reasonable by reference to the interests of the parties concerned and the interests of the public. However, not every covenant in restraint of trade engages that test. Which do and which do not is a question which, as many judges have acknowledged, defies a precise or exhaustive answer.

Traditionally, in deciding whether or not a covenant engages the Nordenfelt test, the Courts have applied the "pre-existing freedom" test. This test, which emanates from the majority speeches in the House of Lords in Esso Petroleum Ltd v Harper's Garage Southport Ltd [1966] 1 WLR 1234, focusses on whether, in entering the covenant, the covenantor was giving up a pre-existing freedom. If, prior to giving the covenant, it was entirely free to trade as it wished, it would be doing so, and the doctrine would apply. But if the covenants were contained in the very transaction which gave the covenantor the opportunity to trade - for example, a lease or purchase of a particular piece of land - it would not be. In the latter case, the doctrine would not apply. The covenant would just be regarded as one of the terms of the deal.

In Esso, however, Lord Wilberforce articulated a different test. According to this test, whether the doctrine applies depends on whether the agreement was one of a kind which "had passed into the accepted or normal currency of commercial or contractual or conveyancing relations". If it had, the Nordenfelt test would not apply. This test has become known as "the trading society test".

In Peninsula Securities Ltd v Dunnes Stores Ltd [2020] UKSC 36 - which was decided after the trial in Quantum, but before the appeal - the Supreme Court rejected the "pre-existing freedom test" in favour of the "trading society" test.

The Quantum Case

In Quantum, the doctrine fell to be applied in an unusual set of circumstances. In 2007, Quantum Advisory Ltd (hereafter, "Quad"), along with two other companies with some common ownership, wanted...