Trego and Anor v Hunt

[1896] A.C. 7

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(Judgment by: Lord MacNaghten)

Between: Anna Trego and William Wilson Smith - Appellants
And: George Stratford Hunt - Respondent

Court:

Judges: Lord Herschell

Lord MacNaghtenLord Davey

Subject References:
GOODWILL
Sale of Goodwill
Canvassing old Customers
Partnership

Judgment date: 5 December 1895

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Judgment by:
Lord MacNaghten

My Lords, the question for the House to determine is this: Is a person who has sold the goodwill of his business, or one in the position of the respondent, who has been taken into partnership upon the terms that the goodwill shall belong solely to his partner, at liberty after the sale or the expiration of the partnership (as the case may be) to solicit the old customers of the business?

There can be no difference in principle between the two cases. In 1872 Lord Romilly M.R. decided the question in the negative in Labouchere v. Dawson. In 1884 the question was determined the other way by the Court of Appeal in Pearson v. Pearson; and Labouchere v. Dawson was overruled by Baggallay and Cotton L.JJ., differing from Lindley L.J., who thought Lord Romilly's decision right. In Labouchere v. Dawson the question arose out of a sale of goodwill. In the present case there is a subsisting partnership between the appellants and the respondent in the business of varnish manufacturers. One of the terms of the partnership is that the goodwill "shall be and remain the sole property" of the appellant, Anna Trego. The partnership will expire on January 1, 1896. The business is extremely lucrative: the connection very large. The respondent is, or was when this action was commenced, employing one of the clerks in copying out the names and addresses of the customers with the avowed intention of soliciting their custom as soon as the partnership expires.

The object of the action was to obtain an injunction to restrain this proceeding on the part of the respondent. It is not necessary to consider whether the action at the outset was or was not open to objection on technical or other grounds, for this much, at least, is to be said in favour of the respondent, that he met the case fairly and frankly from the very first, without any attempt to embarrass the plaintiff or to conceal his own object. His defence was - "The law allows it."

After the observations of my noble and learned friend on the woolsack (Lord Herschell) I do not think it necessary to deal with the question at any length. The arguments on the one side and on the other are summed up in Labouchere v.

Dawson and Pearson v. Pearson, and little remains but to choose between the conflicting views of very eminent lawyers. Nor do I think it necessary to do more than allude to the case in which Sir George Jessel M.R. held that a person who had sold the goodwill of his business could not even deal with his former customers. There, I think, the Master of the Rolls went too far. The decision trenched on the rights of the public. On the other hand, the Master of the Rolls was clearly right in refusing to extend the principle of Labouchere v. Dawson to a sale in bankruptcy. There is all the difference in the world between the case of a man who sells what belongs to himself, and receives the consideration, and a man whose property is sold without his consent by his trustee in bankruptcy, and who comes under no obligation, express or implied, to the purchaser from the trustee.

"A person not a lawyer,"

said Plumer V.-C. in Harrison v. Gardner in 1817,

"would not imagine that when the goodwill and trade of a retail shop were sold the vendor might the next day set up a shop within a few doors and draw off all the customers. The goodwill of such a shop in good faith and honest understanding must mean all the benefit of the trade, and not merely a benefit of which the vendor might the next day deprive the vendee. The authorities, however, are strong to shew that the sale of a goodwill does not import restraint, and that a person selling the goodwill of a business for however large a consideration is not prevented setting up the trade."

In that case, as it happened, there were other circumstances indicating bad faith, and on that special ground the Vice-Chancellor granted an injunction.

I agree, in substance, with the observations which I have quoted from the judgment in Harrison v. Gardner. What "goodwill" means must depend on the character and nature of the business to which it is attached. Generally speaking, it means much more than what Lord Eldon took it to mean in the particular case actually before him in Cruttwell v. Lye, where he says:

"the goodwill which has been the subject of sale is nothing more than the probability that the old customers will resort to the old place."

Often it happens that the goodwill is the very sap and life of the business, without which the business would yield little or no fruit. It is the whole advantage, whatever it may be, of the reputation and connection of the firm, which may have been built up by years of honest work or gained by lavish expenditure of money. I do not think that "a person not a lawyer," to use the Vice-Chancellor's phrase, would suppose that a man might sell the goodwill of his business and then set to work to withdraw from the purchaser the benefit of his purchase.

However, authorities, which it is now too late to question, undoubtedly shew that a man who has sold the goodwill of his business may do much to regain his former position, and yet keep on the windy side of the law. The common law has always been jealous of any interference with trade. It was a lighter matter to interfere with freedom of contract and avoid covenants under seal. Courts of Equity could not of course enforce even in a modified form and within reasonable limits an agreement express or implied which the law would have held void on the ground of public policy; nor could they treat the mere non-observance of such an agreement as fraudulent or inequitable. And so it has resulted that a person who sells the goodwill of his business is under no obligation to retire from the field. Trade he undoubtedly may, and in the very same line of business. If he has not bound himself by special stipulation, and if there is no evidence of the understanding of the parties beyond that which is to be found in all cases, he is free to carry on business wherever he chooses. But, then, how far may he go? He may do everything that a stranger to the business, in ordinary course, would be in a position to do. He may set up where he will. He may push his wares as much as he pleases. He may thus interfere with the custom of his neighbour as a stranger and an outsider might do; but he must not, I think, avail himself of his special knowledge of the old customers to regain, without consideration, that which he has parted with for value. He must not make his approaches from the vantage-ground of his former position, moving under cover of a connection which is no longer his. He may not sell the custom and steal away the customers in that fashion.

That, at all events, is opposed to the common understanding of mankind and the rudiments of commercial morality, and is not I think to be excused by any maxim of public policy. Is it conceivable that the respondent would ever have been taken into partnership if he had hinted at such a manoeuvre while negotiations for a partnership were pending? It was said that you cannot draw the line; but I think the line may be drawn at this point. It is quite true that you cannot protect the purchaser completely. With Lindley L.J. I am disposed to regret it. It is quite true that it would be better that the purchaser should protect himself by taking apt covenants from the person with whom he is dealing. But this, I think, is rather a counsel of perfection than a reason for leaving the purchaser entirely at the mercy of the vendor.

The principle on which Labouchere v. Dawson rests has been presented in various ways. A man may not derogate from his own grant; the vendor is not at liberty to destroy or depreciate the thing which he has sold; there is an implied covenant, on the sale of goodwill, that the vendor does not solicit the custom which he has parted with: it would be a fraud on the contract to do so. These, as it seems to me, are only different turns and glimpses of a proposition which I take to be elementary. It is not right to profess and to purport to sell that which you do not mean the purchaser to have; it is not an honest thing to pocket the price and then to recapture the subject of sale, to decoy it away or call it back before the purchaser has had time to attach it to himself and make it his very own.

I am of opinion that the appellants are entitled to judgment.