Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 is a 19th-century English case decided by the House of Lords. The dispute was about restraint of trade, and the judgment declares when such a restraint (which is prima facie void) may become valid.

The case also established the "Blue pencil doctrine" as a method for deciding whether contractual obligations can be partially enforced when the obligation as drafted in the contract has an element of illegality.

Facts
Thorsten Nordenfelt, a manufacturer specialising in armaments, had sold his business to Hiram Stevens Maxim. They had agreed that Nordenfelt ‘would not make guns or ammunition anywhere in the world, and would not compete with Maxim in any way for a period of 25 years’.

Judgment
The House of Lords held that the restraint was reasonable in the interests of the parties. They placed emphasis on the £200,000 that Thomas Nordenfeldt had received as full value for his sale.

Lord Macnaghten said the following:

The learned judges of the Court of Appeal have come to the conclusion that the earlier part of the covenant is valid. But though they all arrive at one and the same result, they approach the question from somewhat different points of view.

Lindley LJ expressed his opinion that the doctrine “that the only test by which to determine the validity or invalidity of a covenant in restraint of trade given for valuable consideration was its reasonableness for the protection of the trade or business of the covenantee” was “the doctrine to which the modern authorities have been gradually approximating.” But he could not, he said, “regard it as finally settled, nor, indeed, as quite correct.” He thought it ignored “the law which forbids monopolies and prevents a person from unrestrictedly binding himself not to earn his living in the best way he can.” In the particular circumstances of the present case he considered that the earlier part of the covenant was not contrary to public policy. Apart from public policy, he thought it reasonable, not being wider than was “reasonably necessary for the protection of the interests of the covenantee.”

The late Lord Bowen considered that it was the established common law doctrine,—a rule to be gathered from the books “with perfect case,” though certain equity judges had ignored the rule or misunderstood the law—that in the case of contracts in general restraint of trade the Courts had nothing to do with the reasonableness of the transaction. That was an inquiry which appertained only to partial restraints. Contracts in general restraint of trade he defined as “those by which a person restrains himself from all exercise of his trade in any part of England.” “Scores of cases,” he added, “have proceeded on this basis, and those who dispute the rule can only do so, as it seems to me, by disregarding the judgments and opinions of an uncounted number of unanimous common law judges.” But then he thought that the rule, being a rule based on reason and policy, might admit of exceptions; and treating the present case as an exception, he, too, thought the agreement limited to the first part of the covenant reasonable in itself and not contrary to public policy.

A. L. Smith LJ came to the same conclusion, thinking that there was no hard-and fast rule “that every covenant in restraint of trade is ipso facto void if it is unlimited as to space,” and being apparently of opinion that the restraint in the present case, though unlimited in space, might yet be regarded as partial owing to the circumstance that certain trades, or branches of trade, in which the appellant had been engaged were reserved to him by the proviso attached to the covenant.

No doubt it is one thing to say that all exceptions to the general rule that the policy of the law is against restraints of trade are referable to one and the same principle, and that the only true test is, what is a reasonable restraint in the particular case. It is another thing to say that restraints of trade are divisible into two distinct categories—partial restraints and general restraints—that reasonableness is a test applicable to partial restraints and inapplicable to general restraints, but that the rule admits of exceptions; and that when you have found an exceptional case, you may apply to it the very same test which is applicable to partial restraints. There is a distinction certainly. But whether there is a substantial difference it is perhaps unnecessary to inquire. Assuming the rule to be that general restraints are void as being contrary to public policy, and not on any other ground, an exception must surely arise, if exceptions are admissible at all, as soon as you find that the particular case under consideration is not contrary to public policy, and so not opposed to the principle on which the rule is founded.

Thinking, as I do, that the distinction, if it exists, is of no practical importance, I should have been content with expressing my concurrence in the result at which the Court of Appeal have arrived, if it had not been for certain passages in the very able and elaborate judgment of the late Lord Bowen, from which I respectfully dissent.

[...]

In the age of Queen Elizabeth all restraints of trade, whatever they were, general or partial, were thought to be contrary to public policy, and therefore void (Colgate v. Bacheler ). In time, however, it was found that a rule so rigid and far-reaching must seriously interfere with transactions of every-day occurrence. Traders could hardly venture to let their shops out of their own hands; the purchaser of a business was at the mercy of the seller; every apprentice was a possible rival. So the rule was relaxed. It was relaxed as far as the exigencies of trade for the time being required, gradually and not without difficulty, until it came to be recognised that all partial restraints might be good, though it was thought that general restraints, that is, restraints of general application extending throughout the kingdom, must be bad. Why was the relaxation supposed to be thus limited? Simply because nobody imagined in those days that a general restraint could be reasonable, not because there was any inherent or essential distinction between the two cases. “Where the restraint is general,” says Lord Macclesfield, in Mitchel v. Reynolds, “not to exercise a trade throughout the kingdom,” the restraint “must be void, being of no benefit to either party and only oppressive, as shall be shewn by-and-by.” Later on he gives his reason. “What does it signify,” he says, “to a tradesman in London what another does at Newcastle; and surely it would be unreasonable to fix a certain loss on one side without any benefit to the other.” “Any deed,” says Best L.C.J., in Homer v. Ashford, “by which a person binds himself not to employ his talents, his industry, or his capital in any useful undertaking in the kingdom, would be void, because no good reason can be imagined for any person's imposing such a restraint on himself.”

The true view at the present time I think, is this: The public have an interest in every person's carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefore void. That is the general rule. But there are exceptions: restraints of trade and interference with individual liberty of action may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable—reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public. That, I think, is the fair result of all the authorities. But it is not to be supposed that that result was reached all at once. The law has changed much, even since Mitchel v. Reynolds. It has become simpler and broader too. It was laid down in Mitchel v. Reynolds that the Court was to see that the restriction was made upon a good and adequate consideration, so as to be a proper and useful contract. But in time it was found that the parties themselves were better judges of that matter than the Court, and it was held to be sufficient if there was a legal consideration of value; though of course the quantum of consideration may enter into the question of the reasonableness of the contract. For a long time exceptions were very limited. As late as 1793 it was argued that a restriction which included a country town, and extended ten miles round it, was so wide as to be unreasonable. It was said, and apparently said with truth, that up to that time restrictions had been confined to the limits of a parish, or to some short distance, as half-a-mile. But Lord Kenyon, in his judgment, observed that he did not see that the limits in question were necessarily unreasonable. “Nor do I know,” he added, “how to draw the line”: Davis v. Mason. The doctrine that the area of restriction should correspond with the area within which protection is required is an old doctrine. But it used to be laid down that the correspondence must be exact, and that it was incumbent on the plaintiff to shew that the restriction sought to be enforced was neither excessive nor contrary to public policy. Now the better opinion is that the Court ought not to hold the contract void unless the defendant “made it plainly and obviously clear that the plaintiff's interest did not require the defendant's exclusion or that the public interest would be sacrificed” if the proposed restraint were upheld: Tallis v. Tallis.

To a certain extent, different considerations must apply in cases of apprenticeship and cases of that sort, on the one hand, and cases of the sale of a business or dissolution of partnership on the other. A man is bound an apprentice because he wishes to learn a trade and to practise it. A man may sell because he is getting too old for the strain and worry of business, or because he wishes for some other reason to retire from business altogether. Then there is obviously more freedom of contract between buyer and seller than between master and servant or between an employer and a person seeking employment.

When the question is how far interference with the liberty of an individual in a particular trade offends against the interest of the public, there is not much difficulty in measuring the offence and coming to a judgment on the question. The difficulty is much greater when the question of public policy is considered at large and without direct reference to the interests of the individual under restraint. It is a principle of law and of public policy that trading should be encouraged and that trade should be free; but a fetter is placed on trade and trading is discouraged if a man who has built up a valuable business is not to be permitted to dispose of the fruits of his labours to the best advantage.

[...]

You will hardly find any judgment in reference to restraint of trade delivered by any Court in England or America during the last sixty years in which some passage is not cited from some judgment of Tindal C.J. In Horner v. Graves Tindal C.J. delivered the considered judgment of the Court. In the course of it he had occasion to refer to the passage in Mitchel v. Reynolds, which is supposed to be the origin, or at least the earliest embodiment of the doctrine, that a different principle applies to general restraints and partial restraints. “Parker C.J.,” he observes, “says a ‘restraint to carry on a trade throughout the kingdom must be void; a restraint to carry it on within a particular place is good’; which are rather instances and examples than limits of the application of the rule, which can only be at last, what is a reasonable restraint with reference to the particular case.” It is quite true that Horner v. Graves was a case of partial restraint; but here we have Tindal C.J. dealing with the case of a general restraint as well as the case of a partial restraint. With both cases pointedly before him, and in reference to the one as well as to the other, he says that the only rule is, what is a reasonable restraint with reference to the particular case. I do not find that this passage has ever been questioned, nor is there in the books, so far as I can discover, any authority conflicting with it, except the judgment of Lord Bowen in the present case. It may, perhaps, be objected that passages are to be found in the judgments of Tindal C.J. as well as in the judgments of other judges, in which it is said that general restraints are void without adverting to any reason for their invalidity. That, no doubt, is so, and, indeed, in this very judgment there is such a passage. But is it not fair to conclude that Tindal C.J. thought general restraints bad, not because there was an arbitrary law to that effect—a hard-and-fast rule which judges had learned by rote, and the origin of which it was forbidden to explore—but because he took a general restraint to be an example, a typical example if you will, of an unreasonable contract? It does not seem to me to affect the question in the very least how often the dictum may be found repeated, if, on the one hand, it is not accompanied by any reason or explanation, and, on the other, it appears without any authoritative statement that the proposition had become a rule which was neither to be questioned nor explained. It is merely a dictum after all, because there is no reported case, except, perhaps, Ward v. Bryne, in which it could have had any bearing upon the decision. Certainly it is no wonder that judges of former times did not foresee that the discoveries of science and the practical results of those discoveries might in time prove general restraints in some cases to be perfectly reasonable. When that time came it was only a legitimate development—it was hardly even an extension—of the principle on which exceptions were first allowed to admit unlimited restraints into the class of allowable exceptions to the general rule.

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Now, in the present case it was hardly disputed that the restraint was reasonable, having regard to the interests of the parties at the time when the transaction was entered into. It enabled Mr. Nordenfelt to obtain the full value of what he had to sell; without it the purchasers could not have been protected in the possession of what they wished to buy. Was it reasonable in the interests of the public? It can hardly be injurious to the public, that is, the British public, to prevent a person from carrying on a trade in weapons of war abroad. But apart from that special feature in the present case, how can the public be injured by the transfer of a business from one hand to another? If a business is profitable there will be no lack of persons ready to carry it on. In this particular case the purchasers brought in fresh capital, and had at least the opportunity of retaining Mr. Nordenfelt's services. But then it was said there is another way in which the public may be injured. Mr. Nordenfelt has “committed industrial suicide,” and as he can no longer earn his living at the trade which he has made peculiarly his own, he may be brought to want and become a burden to the public. My Lords, this seems to me to be very far-fetched. Mr. Nordenfelt received over £200,000 for what he sold. He may have got rid of the money. I do not know how that is. But even so, I would answer the argument in the words of Tindal C.J.: “If the contract is a reasonable one at the time it is entered into we are not bound to look out for improbable and extravagant contingencies in order to make it void": Rannie v. Irvine.

My Lords, for the reasons I have given, I think the only true test in all cases, whether of partial or general restraint, is the test proposed by Tindal C.J.: What is a reasonable restraint with reference to the particular case? I think that the restraint in the present case is reasonable in every point of view, and therefore I agree that the appeal should be dismissed.

Significance
Following Nordenfelt restraint of trade clauses were prima facie void at common law, but they may be deemed valid if three conditions are met:
 * the terms seek to protect a legitimate interest
 * the terms are reasonable in scope from the viewpoint of the parties involved
 * the terms are reasonable in scope from the viewpoint of public policy.

The question on severability was whether the reasonable restriction could be enforced when it was in the same contract as an unreasonable and unenforceable restriction. The court used the test of whether striking out (with a blue pencil) words containing unreasonable provisions would leave behind a contractual obligation that still made sense. If it did, then the amended contract would be enforced by the court. An unreasonable restraint is severable, and the court enforced the amended agreement that Nordenfelt "for the next 25 years, would not make guns or ammunition anywhere in the world " thus permitting him to trade in those very items in direct competition with Maxim, illustrating the limited practical utility of the rule under its strike-out only stricture.