Marshall v NM Financial Management Ltd

A contract containing an invalid restraint of trade remains enforceable unless the restraint constitutes the whole or substantially the whole consideration for the relevant promise. The court examines the substance of the transaction, without attempting to value competing elements of consideration.

In a unilateral contract, performance of a stipulated condition supplies both acceptance and consideration. A post-termination commission earned through prior service therefore remains payable where an invalid non-competition condition can be removed and the remaining bargain retains commercial substance.

A self-employed financial services agent was remunerated by initial and renewal commission. His agency agreement provided that entitlement to commission ordinarily ceased on termination. Clause 10(g) nevertheless preserved post-termination renewal commission for agents with at least five years’ continuous service who satisfied an age or non-competition condition.

The deputy High Court judge held that the non-competition condition was an unreasonable restraint of trade and that both alternative provisos should be excised. Those conclusions were not appealed. He further held that clause 10(g) remained enforceable because the renewal commission had been earned through the agent’s prior services.

The company appealed on the ground that clause 10(g) should be struck out entirely. The central issue was whether the invalid restraint supplied the essential consideration for post-termination renewal commission.

1. Appeal dismissed unanimously. Millett LJ delivered the leading judgment. Thorpe and Butler-Sloss LJJ agreed.

2. A promise supported partly by an invalid restraint of trade does not automatically fail. The contract is struck down in its entirety only where, in substance and irrespective of form, it is an agreement for the invalid restraint. The relevant formulation is whether the restraint constitutes the whole or substantially the whole consideration for the promise. The court does not assess the comparative value of the several elements of consideration.

3. The contractual language and structure are of prime importance when determining the substance of the transaction. They are not conclusive where they employ an artificial stratagem to disguise the parties’ true bargain. The decisive inquiry is therefore commercial and substantive.

4. A restraint may be imposed either by an enforceable promise not to compete or by making a benefit conditional upon abstention from competition. The restraint-of-trade doctrine applies in either form.

5. Clause 10(g) constituted a unilateral or “if” contract. Although the agent had not promised to perform its conditions, performance would provide both acceptance of the offer and the consideration necessary to enforce it. Even if the clause were considered separately, five years’ service supplied valid consideration alongside the invalid restraint.

6. The clause also formed part of the complete remuneration package offered to induce the agent’s services. The limited post-termination renewal commission was earned by procuring business before termination. The invalid restraint merely added a new condition to an existing commission entitlement; it did not convert the commission into consideration solely for abstaining from competition.

7. The remaining part of clause 10(g) consequently survived excision of the invalid provisos. The agent remained entitled to post-termination renewal commission. The appeal was dismissed with costs, and leave to appeal to the House of Lords was refused.

1. Court of Appeal: The company’s appeal was dismissed unanimously. The deputy judge’s conclusion that clause 10(g) remained enforceable after excision of the invalid provisos was upheld. Leave to appeal to the House of Lords was refused.

2. High Court, Chancery Division: Mr Jonathan Sumption QC, sitting as a deputy judge, held that the non-competition condition was an unreasonable restraint of trade. He excised both alternative provisos but preserved the remainder of clause 10(g), holding that the renewal commission was earned through the agent’s prior services.