Legal Updates

Overstepping on your restraint of trade clause?

The recent High Court case of Commerce Commission v First Gas Limited highlights the need for businesses to think carefully about restraint of trade clauses when it comes to their contractual arrangements.

In 2016, First Gas, which operates in the gas transmission and distribution markets, initiated an attempt to acquire Gasnet Limited’s (“Gasnet”) gas distribution assets in Papamoa.  Gasnet was initially reluctant but, following First Gas’ expansion into Papamoa, agreed to sell their assets, and a sale and purchase agreement was signed (“Agreement”).

The Agreement contained a restraint of trade clause which stipulated that Gasnet could not engage in the provision of gas distribution services in the Bay of Plenty region for 5 years.  The Agreement was not conditional on obtaining clearance or authorisation from the Commerce Commission (“Commission”).  Despite this, the parties wrote to the Commission (on the day of signing), advising it of the acquisition.  However, by the time the Commission contacted the parties to request further information, the Agreement had become unconditional. 

The Commission subsequently initiated proceedings against First Gas, alleging legal breaches, which First Gas admitted. 

Significantly, the High Court held First Gas was in breach of the Commerce Act 1986 for (among other things), its use of a restraint of trade clause in the Agreement, being a provision which was found to have, or likely to have, the effect of substantially lessening competition in a market.

Mallon J held the Agreement reduced current competition and prevented future competition between First Gas and Gasnet, for at least the period of the restraint.  The Court stated that restraints of trade are permissible provided they are solely to protect the goodwill in the business purchased. The problem here was that the restraint of trade went further than was necessary because it purported to prevent GasNet from entering anywhere in the Bay of Plenty (not just the area serviced by the Papamoa delivery point) and for a period of 5 years.

First Gas was liable to pay $3.2 million in pecuniary penalties (including a 25 percent discount due to First Gas’ cooperation).

While the enforceability of restraint of trade clauses is often questioned, what this case highlights is that the Courts may penalise businesses who seek to impose overly restrictive restraints of trade clauses.

If you have any questions relating to restraint of trade clauses in contractual arrangements, please contact Sarah Churstain or Jono Cole.