Commercial Summary and Practical Implications
The case of Biosol Renewables UK Limited v Lovering  EWHC 71 (Comm) provides some helpful guidance as to when a Court will strike out clauses which amount to an unreasonable restraint of trade.
The case concerned a claim by Biosol for unpaid balances relating to the sale and installation of ten biomass boilers at a property owned by R & A Properties in Wales. A collateral contract was also agreed whereby Biosol were granted the exclusive right to maintain the boilers and supply the woodchip fuel for a period of three years.
R & A sought to avoid payment by arguing that Biosol had failed to exercise reasonable care when recommending the installation of the boilers and that the goods were not fit for purpose. The Court dismissed those arguments.
However, the Court had more sympathy when it considered an argument by R & A about the reasonableness of the collateral contract. There were two key components of the collateral contract, as follows:
- R&A were to permit Biosol to carry out repairs and maintenance for 3 years, and were prohibited from obtaining those services from another party for the same period;
- R&A were to purchase woodchip fuel from Biosol for 3 years, and were prohibited from obtaining woodchip fuel from another party for 3 years.
The Court considered whether either of these components amounted to an unreasonable restraint of trade.
The test for what amounts to an unreasonable restraint was recently considered in the case of Quantum Advisory Limited v Quantum Actuarial LLP. The doctrine of restraint of trade states that a restraint of trade clause will be invalid unless it is:
- designed to protect a legitimate business interest;
- no wider than reasonably necessary to protect that interest; and
- not contrary to the public interest. (Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd  AC 269).
The Court held that there was no issue with the requirement for the maintenance to be carried out for 3 years by Biosol – the Court noted that such clauses are common.
The Court, however, considered that the following clause was an unreasonable restraint of trade:
“Purchase from [Biosol] all wood chip required to supply a 500k boiler for the purpose of maintaining its output at maximum capacity for a period of 3 years where applicable”.
The Court stated:
“That, in my view, is objectionable and unreasonable both in the interests of the parties and in the public interest, because it requires the boilers to be run at maximum capacity regardless of whether or not that is (a) justified or required by the needs of the occupiers or the landlords or (b) consistent with proper considerations of environmental wellbeing”.
The Court held that severance of the offending clause was permissible under the relevant three stage “blue pencil” test. This requires the Court to consider the following:
a) Whether the unenforceable wording can be removed without adding to or modifying the remaining words;
b) Whether the party agreeing to the restrictive covenants received something in return; and
c) Whether the removal of the unenforceable wording would generate any major change in the overall effect of the restrictive covenants.
In this case, the Court held that removal of the clause would not affect the main intention of the collateral contract: namely, to provide Biosol with exclusivity for maintenance of the boilers and supply of woodchip fuel.
Accordingly, whilst Biosol was successful on all grounds of its claim, the Court did provide a warning regarding the structuring of such contracts. Commercial providers of renewable energy infrastructure or sources of fuel (or other parties entering into contracts with restrictive covenants) should consider the wording of similar exclusivity contracts to ensure that, if they do contain such terms, they can either be removed, or are at least fully severable, in case of any future court action.
If you would like to discuss this topic in more detail, please contact Judith Hopper.